The Economy

HL Deb 04 March 1992 vol 536 cc873-920

Debate resumed.

5.3 p.m.

Lord Jenkins of Putney

My Lords, we return to the Motion, so well moved by my noble friend Lord Peston, to call attention to the state of the economy and its social consequences.

After 13 unlucky years of Tory rule we find ourselves in the longest recession this country has endured since the 1930s. That is perhaps an aspect of the state of the economy, but it is also an aspect which has grave social consequences of all kinds; and the Government expect to get re-elected! If they are re-elected it will be a case of never in the history of British politics have so many been conned by so few.

Sir John Harvey-Jones said in the Observer last Sunday that we have declining production, falling GDP, diminishing re-investment in productive capacity, increasing unemployment, falling property prices, a record rate of house repossessions, near record rates of bankruptcy, and increasing bad debt provision by the banks. What do the Government call this scene of disaster over which they have presided? They call it ideal conditions for recovery.

They admit that the light at the end of the tunnel which Tory Chancellors used to see—indeed, the present Chancellor caught a glimpse of it earlier in his incumbency —has temporarily disappeared; but the Chancellor desperately hopes that it will not be long in coming back. It is just round the corner, he imagines. No doubt it will miraculously reappear if Mr. Major is sent back to Downing Street, they plead.

The noble Lord, Lord Brabazon, who spoke on behalf of the Government, put a brave face on the sad condition. He did rather better than some of his colleagues I have witnessed in another place Ministers who looked to me rather like a bunch of con-men who had lost their confidence. The Government say that it is not their fault that we are in this mess. They say that we have got ourselves into it by over-consumption. Now they say, with even less conviction, that we can only get out of the mess by resuming our bad old habits and over-consuming still more.

Who is going to swallow that prescription? Will the banks begin lending recklessly again? Is the increasing consumption to he met by increasing home production or will it be met by further increasing imports? As my noble friend Lord Peston pointed out, we cannot even achieve a trade balance now. The Government's medicine will surely kill the patient.

The Japanese and German economic performance is not based on "hands-off" government and low taxation; it is based on government intervention and government support, and on very low defence expenditure. But that is anathema to our ideologically-driven Government and to their supporters who mismanage and misdirect much of our declining industrial base. It would be interesting to see whether, as I suspect is the case, that like our incompetent Government our business directors are also mainly the product of our so-called public schools. That is another handicap which they do not suffer in Japan and Germany.

The Institute of Directors is the equivalent of the old Trotskyite fringe in the Labour Party. Unfortunately for the Government, their Trots are still influential. While that remains the case, as Sir John Harvey-Jones has pointed out, it is not easy for I British business to establish the sort of relationship with civil servants which has been a factor in finding common goals in competing countries. Fortunately, compared with the Institute of Directors, the more important CBI is relatively sane.

The truth is that over the past 13 years, taken as a whole, we have been losing ground. The outdated doctrines which still underpin—or perhaps the word should be undermine—the Government are a main cause of the trouble. It is time for a change. No sudden cure is possible, but it is possible to arrest and reverse the 13-year decline. For that we need a new government, and Labour is ready to take over. For 13 years the electorate has been conned into returning a Tory majority. If the voters fall for the con yet again, the consequence would be irretrievable disaster.

5.10 p.m.

Lord Selsdon

My Lords, by background and inclination and in spirit I am an islander. I take as a theme for my intervention today one of those sayings I remember as a child when things were bad and one felt depressed—"Pray for the undertaker's wind", that soft offshore breeze that carried away all the bad thoughts and bad smells and left clean air in which to sleep and think.

In taking as a theme the word "undertaker", I remembered that somewhere "undertaker" was looked upon once with enthusiasm and pride. It was replaced, as the noble Lord, Lord Joseph, reminded us, with the word "entrepreneur". But an undertaker was someone who initiated or took part in a business enterprise. The Oxford English Dictionary today puts after that definition the word "rare". Indeed there was a period when the undertaker was extremely rare. But a new wind blew with this party when it came to government and created what we called the spirit of enterprise which has been attacked today. It encouraged people to go out, to start on their own with pride, to borrow money with pride, and build businesses. That spirit led to a change of attitude in this country which, whatever our political beliefs may have been, we had to welcome.

Someone will ask, "What went wrong?" We have heard analyses today of a number of factors. I shall touch on a few briefly. What went wrong involved not just domestic issues or international issues but a failure to recognise what was being said at the coalface. I am not a bright economist but I have often thought, when governments have done things that I have felt were wrong, "Why did they do it?" I believe there is a long lead time when information which is the truth about an economic situation makes its way through the corridors of Whitehall to the thinking minds of the Treasury.

The first sign to me was when we had moved into Europe and should have joined the ERM, which I supported. The noble Lord, Lord Joseph, did not. The mistake was that we joined it too late. That has been said before. We joined it after the crisis had come and we were forced to raise interest rates. As a result, we ended up going in at too high a rate. The second sign was the over-reaction in relation to Black Monday and the crash of the Stock Exchange. That was a fairly shallow reaction but it was, as noble Lords on all sides of the House have said, predictable. They would perhaps have reacted in the same way. The stock markets have a habit of predicting recessions way in advance of things. We were probably in for recession in any event, but that it hit us earlier and harder is obvious. Indeed when I last spoke on economic matters I referred to a really great depression which I believed we were in and would possibly remain in for some time.

I do not have a solution but I believe that in part of this debate we have a right to make suggestions to government. I shall do so on a couple of fronts. I begin on the home front. The depression at home is in part real and in part psychological. I shall direct my remarks, if I may, to the Liberal Democrat Benches because one of the factors that causes greater depression is fear of loss of wealth and the feeling that recovery will never take place. We are, within Europe and within the G7, the greatest home-owning democracy. The fear that houses may be repossessed or that the value of our houses may fall is a very depressing factor indeed. The initiative taken by the Government—perhaps encouraged by noble Lords on those Benches—of removing stamp duty temporarily should be extended so that stamp duty is removed altogether for first-time buyers. That would help to stimulate the market. One does not look for help for the top end, but for those who are marrying and starting out there has to be a starter move because we will not change the attitude—the good attitude—of wishing to own homes.

The second area lies in this strange question of mortgage relief. I am one who opposes the whole concept of distorted mortgage relief. However, if there is no support for homes at this time we may have this continual feeling of depression as wealth is tied up in houses.

The third area on the home front that should be considered —I do not follow any socialist policies on this—is spending on infrastructure. There always needs to be spending on infrastructure. The time to spend money on infrastructure, if one has to, is when it is cheaper to do so than ever before. At the moment the water authorities, which have been privatised quite successfully, have recognised that they can complete their infrastructure more quickly, more efficiently and at a lower cost today than they could in a boom period. I suggest that the Government might at this time consider advancing their own infrastructure programme. They may find that they can do it far more cheaply today than if they defer it over a longer period.

I shall now move into international themes. We think that the depression applies only to us. I thought that we were way behind other countries but I have just been to Germany, France and Switzerland. I have also met Norwegians and others. I must tell the House that in many cases their state of depression is greater than ours although from different bases. At one time Switzerland had negative rates of interest. The rates are now 7 per cent. or more. Such countries are not used to it. Germany also has its problems. France may come out of depression more quickly but the North Sea area of Norway and the whole of Scandinavia have suffered serious problems. It is not a domestic issue. We must ask ourselves how we can recover, because in a way it will be an international recovery that leads us out of depression.

The Labour Party says "invest", but one only invests if one sees an opportunity to trade. Some say that my party believes that the recovery should he consumer led. All recoveries should be genuinely trade led. At the moment, with around 90 per cent. of the world virtually cut off from the G7 group because of currency problems, we have created by accident a narrower and narrower market. If we trade only with G7 countries we are incestuous and cannot create growth.

I suggest that the Government might look again at increasing the resources made available for the financing of trade and extending such concepts as the know-how agreement. They should not withdraw in these areas, as has happened before, because manufactures cannot be sold to countries with soft currencies unless there is some form of support. Bilateral trade is the way to encourage growth.

The Government have made an important point on which I support them. Our inflation has come down to a level which is below the average of the G7 countries and of the EC. That is commendable. But if part of the policy is the use of interest rates, and if our rate of inflation is below the average of the EC and the G7 countries, why are our interest rates 2.5 per cent. above the average of those countries? How can the United States, which had interest rates of 10 per cent., drop them down to 3 per cent. or 4 per cent. and not suffer? In fact the dollar is relatively stable.

I believe that a way could be found, perhaps in discussion with other members of the ERM, of moving towards a substantial reduction in interest rates. I do not believe that our own interest rates should ever be allowed to rise above twice the prevailing rate of inflation. At 10.25 per cent. they are too high. Perhaps the past has strapped us into an undesirable strait-jacket. Be that as it may, the point should be considered.

We shall not move out of this depression quickly and that may not be a bad thing. I have been taught by my son, who is a pupil of the noble Lord, Lord Desai, that when one has depression, ultimately the level of activity falls to a minimum. There is a minimum level because of government spending even though there may be postponement of decision. Then the shrewd and wise man or wise virgin invests not for tomorrow but for the day after the day after tomorrow —for the future. Production has been cut back and we have an efficient industry. There are prospects of a good recovery for us in competition with others.

At the end of my allotted time I return to the theme of the undertaker. I ask myself why that noble person, the man who went out to help people to do things, is replaced by what in French one calls a croque morte. When examining this I came to the conclusion that there were people around who wanted to deal with the dead bodies of good people. They used to go and bite the toe of the body to see whether it was alive or dead, as may have happened with noble Lords opposite today. They would say as they bit it, "Croque madame" or "croque monsieur". One is a toasted ham and cheese sandwich and the other a toasted cheese and ham sandwich. I would not accuse noble Lords opposite of being "old croques", but their policies certainly are.

5.20 p.m.

Lord John-Mackie

My Lords, I think that I have seen the day when I could get up and make a 10 minute speech as good as that of the noble Lord who has just sat down without a note of any description. Perhaps noble Lords will excuse me if, at my age, I use what might be termed "copious notes". I should like, first and foremost, to congratulate my old friend the noble Lord, Lord Rodgers, on his excellent maiden speech and on the fact that he concentrated, and put across a very good point, on the construction industry. En the House of Commons we used to sit on the same Benches; but he has moved around since that time. However, I notice that he is sitting at the end of the Chamber and that he has not far to go to move across if he wishes to do so some day.

I propose also to speak about the economics of my own industry. But I should like first to point out what I suppose are the social consequences mentioned in the title of the Motion in some industries, as illustrated by the headlines of the Observer which I read about three weeks ago in the business section. I was amazed at the eight headlines that I read. I have the newspaper here with me should any noble Lord doubt my word. I have put them together in order. The first one said, "Virgin Atlantic dips to £3 million loss". The second one was, "Ramsden lost £57m on the horses". The third one said, "Bank resists rate cut as redundancies mount". The fourth one referred to "Fraud: Nightmare on Elm Street". I do not know where Elm Street is, but that was the headline. The fifth read, "Mafia linked to $800bn share scam". Again, I am not too familiar with the word "scam". The sixth stated, "Axe poised over NatWest". The seventh read, "Levitt faces £56m fraud charges". The eighth said, "Mayhew acquittal threatens Guinness II". Then, in the corner of the newspaper, there was a nice little piece about one of my friends, Mr. Peter Walker, who has collected something like £400,000 to leave Maxwell's empire. I do not know what the pensioners are saying about that detail, but I thought it was worth mentioning.

If one adds to that list what is happening at Lloyd's and at Maxwell's—and of course I do not want to embarrass noble Lords opposite on the headline which appeared in the Independent today, but I think that it is one of the social consequences which will have to be investigated so far as I can see—one wonders what is going on in those businesses, and what the directors do which allows such things to happen. I do not understand it. I am glad to say that my noble friend Lord Dean of Beswick, who is not present today, has tabled a Question for Tuesday of next week on the matter. I look forward to hearing the Government's reply.

I turn now to agriculture. Farming, forestry and horticulture use the land in this country and the three together form our largest industry. Farming and horticulture together are a very good second. We employ directly 650,000 people and produce up to 75 per cent. of our temperate foods. Turnover is £12.5 billion, and of course the processing and distribution of that turnover creates many jobs in other industries. That is something that we are inclined to forget. Over the past few years, farming has also been spending about £8,000 million on inputs, services and capital goods, which create industries to produce them. Those industries find it of great value to have home business. They can also export, particularly as regards tractors and much of the agricultural machinery that we produce in this country.

I do not wish to bore your Lordships with too many figures, but I should like to give the House some idea of the increases in productivity. From 1950 to 1989 the rise in wheat was from two-and-three-quarter tonnes per hectare to seven tonnes per hectare. I must give the plant breeders, for whom I have great respect, considerable kudos for that. They have done a tremendous job in giving us plants to enable us to do such things.

Production of milk rose from 2,500 litres per cow to 4,750 litres per cow. That is nearly double. That has been achieved by a tremendous improvement in the nutrition and the management of the dairy cow. Increases in labour productivity, taking 1978 at 100, rose to just touching 160 in 1989. The whole country's economy on the same basis rose to just under 130. That is roughly the picture up to the beginning of 1990, except that a trade balance in food in 1980 of £2.8 billion in our favour has gone to a £12.8 billion deficit in 1990—that is exactly 2.3 per cent. of gross national product.

That cannot be allowed to continue. Over the past 20 years, but particularly in the past 10, agriculture has lost 122,000 workers—that is, 31 per cent. At the same time, the number of farmers has dropped from 230,000 to 178,000. That is a fall of 52,000—over 20 per cent. Bankruptcies are about 200 per year. That figure does not include the enormous number giving up voluntarily. All told, the farmers leaving the industry amount to about 50 per week. That is not surprising when the drop in profits is just touching 50 per cent.

What is the effect of all that? There are two main ones: the physical and environmental change in the countryside; and the loss to the economy of a fully productive agriculture. Apart from anything else, farmers have taken 400,000 acres out of production by taking set-aside grants. That means a loss of about £80 million to £100 million worth of production, plus the cost of the grants.

The average size of farms in the UK is about 180 acres. If the present trend continues—and I discussed the matter with my noble friend Lord Carter who is not present in the Chamber today—it will have a tremendous effect. They will get bigger and bigger with more emphasis on cropping and less on stock. It is stock that we require in this country to produce milk, beef, and so on. We need a balanced agriculture. We shall not achieve that if the present trend continues. The working population will decrease and there could be a complete change in the countryside as we know it. We do not want that to happen.

I could say more. I have not touched on forestry. It is too big a subject to deal with in 10 minutes; nor have I mentioned GATT or the common agricultural policy. The delay in coming to some decision between the two is most frustrating. Farming is a long-term business. A bicycle can be produced in a few days, but it takes nine months to produce a calf, and you need a year's warning to produce a crop of wheat.

British agriculture is capable of producing nearly 100 per cent. of the food that the nation requires. If that was done, it would mean a boost to the economy of more than £1.5 billion. Agriculture will need some help and encouragement if it is to do that—and, my goodness! that is sorely needed. I believe that the noble Lord, Lord Selsdon, will agree with me on that. We need that help; but, above all, we need the promise of long-term planning. The uncertainty that has been created is having a very bad effect on the farming community. I like to think that whichever party forms the next Government. it will recognise that point and will ensure that agriculture is given its proper place in the economy.

5.30 p.m.

Lord Cobbold

My Lords, first, perhaps I may add my congratulations to those that have already been paid to my noble friend Lord Rodgers on his excellent maiden speech. I welcome him to his rightful place on these Benches. As many noble Lords have acknowledged, the recession is not unique to Britain and our recovery from it necessarily depends upon developments in other major economies, as well as here. However, we cannot blame our neighbours for the fact that the recession here is worse than elsewhere.

The blame for that must lie closer to home. To be charitable—as several noble Lords have been—we seem as a nation to suffer from an addiction to boom-bust economic management. But the Government cannot escape the blame for their inaction in early 1988, and especially for their Budget at that time which fuelled the credit blaze and the house price bonanza. Action came too late, by which time the damage was done and the path for our current difficulties was set.

We now have a situation where all parties profess to believe that the boom-bust cycle must not be allowed to repeat itself. All are committed to ever closer convergence with our Community partners and, above all, to the exchange rate mechanism. It is important to remember that our membership of the exchange rate mechanism is one very important difference between our situation now and our situation in the previous recession.

There are several other important difficulties, all of which have some alarming implications. I shall touch on three. First, the extent of consumer indebtedness is quite unprecedented. As was highlighted by the noble Baroness, Lady Hollis, personal debt in relation to personal disposable income is running at no less than double the level of the previous peak nearly 20 years ago in 1973. As a corollary, personal discretionary saving collapsed during the second half of the 1980s and began to recover only in 1990 as the recession started to bite. It is still at levels well below those pertaining in the last recession. That suggests that consumers, faced with an unprecedented level of debt, with a depressed housing market and with unsure employment, may require a prolonged period in which to build up their savings again. Consumer expenditure may thus remain sluggish for some time to come.

The second rather alarming difference between this and previous recessions is the rapidly rising public sector deficit. There was a continuous swing from deficit to surplus during the 1980s but at the end of that decade the combination of the slump and the Government's discretionary spending increases had caused a dramatic reversal. My noble friend Lord Jenkins has already referred to the worrying increase in debt. A public sector borrowing requirement of £30 billion is widely expected for next year. If in the event consumers prove more cautious than expected and Treasury growth forecasts are not achieved, that figure could be pushed still higher to levels that have not been seen since the crisis years of 1975 and 1976 when Denis Healey turned back from Heathrow and the International Monetary Fund stalked the corridors of Whitehall.

The third major difference—and perhaps the most worrying—is the weakness in the balance of payments, to which several noble Lords have already referred. A dash for growth foundering in the face of a balance of payments deficit is a familiar story in this country. However, in previous recessions we have actually run a balance of payments surplus, with the deficit arising only as we emerged from the recession. This time we have a deficit of about 1 per cent. of gross national product at the trough of a very deep recession.

The significance of those three factors is that we are on very thin ice. We face serious consequences if we succumb to over-stimulating the economy in a vain effort to buy votes. Our chances of maintaining our ERM commitment would evaporate—the noble Lord, Lord Joseph, and probably several other noble Lords would welcome that—but it would mean a return to high interest rates, to currency depreciation and to renewed inflation. No, the patient needs careful aftercare if he is to return to normal health and be fit enough to play alongside our Community partners.

There is one hopeful sign—perhaps I do not fully agree with my noble friend Lord Jenkins on this. There are some encouraging signs that pay increases may at last be responding more flexibly to economic conditions than in the past. Percentage pay increases have recently been falling rapidly and it is vitally important that that trend continues. The only hope of achieving the prize of non-inflationary growth lies in reducing our inflationary expectations and our pay increases to 3 per cent. or less and keeping them there. That is the advantage to be gained from our commitment to the exchange rate mechanism, and we must not shrink from it.

The economy may now be past the trough of the recession, but it needs an extended period of convalescence. I hope that the Chancellor will not be blinded by perceived electoral advantage into taking measures that will start the boom-bust cycle all over again. That would be very damaging to this country and decidedly ungracious to his successor.

5.36 p.m.

Lord Hatch of Lusby

My Lords, I am pleased to be sandwiched to speak between the noble Lord, Lord Selsdon, who has already spoken, and the noble Lord, Lord Boardman, because they were two of my colleagues on the Aldington Committee on overseas trade in 1985 when we, as a cross-party committee, forecast precisely what would happen and why. We said that, unless manufacturing and overseas trade were supported by the Government following the decline in oil revenues, what has happened would happen. I do not intend to go into the details of that because we have debated it several times, but our conclusions are still worth reading as an analysis of the present situation. The Government disregarded our conclusions then and the results have been as we forecast.

When the noble Lord, Lord Henley, replies to the debate, I think that we are entitled to hear a statement of Conservative socio-economic philosophy and the policy on which the Conservative Party bases that. I think that we are entitled to that because we are bound to be in some confusion. In 1980–81 in the first recession under this Conservative Government, we were told that it was wrong to increase the public sector borrowing requirement because that would be inflationary. We were told that we must restrict our money supply and that it was wrong to budget for a deficit. We were told that government spending would only increase inflation, that financial deregulation would set the markets free, that trade unions must be hit hard in order to bring them to heel, that manufacturing industry had to be devastated—the Government called it a "shake-out" —and that there had to be a massive increase in unemployment.

Then in the latter part of the 1980s we saw the Government expanding credit, increasing the money supply, cutting taxes, shadowing the mark and encouraging bank lending—with the normal consequence of high inflation followed by high interest rates. Which of those is the Government's policy? Or, as we are now told in this second Conservative recession, which has lasted from 1990 to the present day or even some time into the undisclosed future, is it the case that the one feature that is common to both is that unemployment must rise? Indeed, unemployment has risen by over 1 million in the past 12 months. This time, however, we are told that it is right for the Government to borrow to pay for tax cuts; for the Government to increase tremendously the PSBR, and that there should be a massive increase in the money supply. Which of those policies is now being followed by the Government? Which belongs to Conservative socio-economic philosophy and the policies derived from it? We have a right—I hope that the Minister will fulfil the obligation—to be told clearly what is the Conservative Party's philosophy and what are the policies upon which it is based.

Within all the various trends of Conservative Party policy there has been one constant theme: provided that people become richer, that benefit will trickle down to all the other stages of our society. The trickle-down theory was the rationale for cutting the top rate of income tax. Has that worked? Will the Government tell us whether it has worked? I shall supply them with some hints. From 1979 to 1989—taking the annual real income of an average household —the income increase from £10,560 to £13,084 (at 1989 prices) is £2,523 per year; but the income of the poorest 20 per cent. of households fell from £3,442 to £3,282, which is a decrease of £160 a year. We should not let the Government tell us that all sections of society have benefited from their economic policies. They have not. The poorest have become poorer in absolute terms. The poorest households are today suffering from a lower household income than in 1979. Those are the Government's own figures. However, the richest 20 per cent. of households have increased their average income from £20,138 to £28,124, an increase of £7,986—just about twice the average income of the poorest households.

On other figures, the poorest 20 per cent. have lost 4.6 per cent. over that 10-year period, whereas the richest have increased their income by 39.7 per cent. I challenge the Minister to deny those figures which are taken from government sources. In this country the poor have become poorer, but we live in a global society. It is right in the debate also to ask what have been the social effects of economic policy on rich and poor in the world as a whole.

It is hardly necessary for me to repeat that over the past 10 years, especially in the poorer parts of Africa, there has been an absolute decline in standards of living. They have declined to the mortality of starvation. What has our country been doing during that period? I say this again in reference to the Aldington report. The committee went into this matter in great detail. We were given evidence by manufacturers in this country about the impact British aid has on their trade with the developing countries. Between 1979 and 1980 our exports to developing countries fell from 27 per cent. to 18.5 per cent., a decline of 8.5 per cent.; our imports declined from 20.8 per cent. to 14.5 per cent., a decline of 6.3 per cent.; and our share of world trade with developing countries also declined, but I do not have time to give the figures.

That means in effect that we have been diverting our trade from the developing countries—the half of the world where the market is closed—to our developed competitor countries. I shall give one example that I have given before: in 1985, British Leyland closed down the Bathgate factory which made vehicles. Why? It was because it had been tooled up to make vehicles for Nigeria, but the oil price collapse in Nigeria meant that they could buy no more than 2,500 vehicles, although the factory had been tooled up to produce 10,000 vehicles. The Bathgate factory was closed; British workers were put out of work; and the Nigerians did not have the vehicles to transport food around the country. That is the direct connection between our economic and social standards and those of the developing world.

As we know, during their period in office the Conservative Government have reduced aid to the developing world from 0.53 per cent. of GNP (as it was when we left office) to 0.27 per cent. The committee was told time after time that aid and trade go together. Aid assists British trade. We now see that not only has that aid been reduced; there has been a change in the direction of resources. More resources are coming from the developing world into this country and the rest of the developed world today than are leaving the developed world for the developing countries. The Government's economic policy has caused deepening class polarisation at home and has contributed to the widening gap between rich and poor in our global village.

5.47 p.m.

Lord Boardman

My Lords, I am happy to be reminded by the noble Lord, Lord Hatch of Lusby, of the Select Committee upon which he, my noble friend Lord Selsdon, and I were privileged to serve. I think that he will agree that many of the complaints made in the Select Committee report about manufacturing industry have since been remedied.

Lord Hatch of Lusby

My Lords—

Lord Boardman

My Lords, I shall not give way, if the noble Lord will forgive me. We are debating the state of the economy and its social consequences. I shall take the state of the economy first. I concede straight away that there has been the most protracted recession since 1945. It has not been the deepest by a long way. We have had six quarters of recession; that is, if we ignore the sectional point about the oil. I am sure that we are now coming out of the recession. All the signs are that we are coming out of it in the first quarter of this year. It was most severe in the first two quarters of last year. It steadied, and almost levelled out, in the last two quarters of last year. All the signs are now that we are on that improving trend.

There were reasons for the recession, and they have been referred to during the debate. Obviously some mistakes in the economic management were made. Reference has been made to the drop in interest rates after the October 1987 crash. With hindsight we now see that that was wrong. Noble Lords opposite rightly do not take advantage of that fact because they thought, as I thought, that it was the right course to take at that time.

What is more important is the world recession. We are not an isolated country that can operate regardless of what is happening in the world as a whole. There has been, and is, a massive recession in countries that are of considerable importance to us: the United States of America, Canada, Australia, New Zealand, much of Europe, and the like. The noble Lord, Lord Jenkins of Putney, held out Germany as an object lesson to us—a model that we should follow. If we look at what is happening to Germany now, we find that it has inflation comparable with ours at the moment, but its inflation is increasing while ours is coming down.

In Germany, increases in wage demands are in excess of 10 per cent. against our increase of 4.1 per cent. Money supply is rising at a rate which is unheard of in Germany, interest rates are comparable with ours and unemployment is rising. The model state of Germany, held up as an example to us, is, I believe, going through a worse period than we are, as we come out of it. Many countries are in a worse economic position than Germany—countries which have been and are important to our economy. We cannot steer clear of the world recession and believe that we are isolated and can operate without regard to it.

I very much welcome the clear and encouraging signs that we are coming out of the recession. Perhaps I may quote one or two facts. I said that our pay settlements are now 4.1 per cent. and that has enabled our unit costs to equal the lowest in Europe. At the same time, because of the productivity increases forecast by the CBI of over 6 per cent., average earnings have been able to increase to about 3 per cent. above inflation, with no increase in unit costs.

As regards destocking, for a period of two years at all levels of industry there has been destocking. That is coming to an end and stocks are building up again. That may have an adverse impact in the short term on our balance of payments, but it will regenerate the recovery for which we are all waiting.

Exports are holding up very well indeed, being about 8 per cent. up on last year. Here I disagree with my noble friend Lord Joseph. I have always followed his views with care and admiration, but I do not share his anxiety about the ERM. I believe that it was right to join and that, despite those who feel we went in at the wrong rate, the way in which our exports are holding up shows that we went in at the right rate.

Company debts have been reduced by £8 billion during 1991. We know that interest rates have come down eight times. A further fact of which we must take account is that the savings ratio has been building up to an exceptionally high figure in the country—11.2 per cent. I believe that during the coming 12 months we shall see it reduced to a more normal level, about 10 per cent., which will release purchasing power into the economy. That will help our recovery.

For the 91 per cent. of the population who are in work, the economy is pretty good. There has been an increase in their spending power of about £40 a week, if we take account of the reduction in interest rates and the increase in earnings. I see from the Financial Times today that, according to a survey published yesterday, the average British household is 20 per cent. richer in real terms than it was 10 years ago. I accept that, as the noble Lord, Lord Hatch of Lusby, would say, dealing with averages is misleading. Many people have a reduced standard of living and do not share in the degree of prosperity. However, the general buoyancy of the economy has not been reflected by the Benches opposite.

The consequences of the recession have been extremely painful for those who are unemployed. I know that the increase in unemployment concerns all sides of the House. The Government are putting more and more resources into employment services with improvement in training, but the figure for the unemployed will diminish only as the recovery takes place. There is a lag in the figure, as we all know.

Of course, there have been too many business closures. There is always a cycle of such closures and we should not forget that there are now 3 million companies in the country whereas 10 years ago there were only 2 million. Neither should we forget what is being done in taxation. Corporation tax was 52 per cent. and it is down to 33 per cent.

Another sector which has suffered is housing and I am sure we all have great sympathy for the problems of those whose homes are repossessed. There again, government support for mortgage interest, rescue schemes for lenders, the suspension of stamp duty and the like are aimed at alleviating that difficulty.

I believe that we are coming out of the recession. We need world growth in order to obtain the full benefits from our economy. If we run through what has been provided and is available to British industry, it should put us in a good position. First, inflation is at a rate below that of the whole Community. We have the lowest taxation level for industry in the industrialised world. Our industrial relations are unequalled. I believe my noble friend said that for 100 years there had not been a record of industrial peace to equal what happened in 1991.

Export volumes are at record levels. We export a higher proportion of our GDP than Japan. However, listening to the Benches opposite, I feel they are clearly out of touch with the real figures and what is happening in the world or in our economy. If we look at inward investment, people are investing more in this country than anywhere else in the Community; 40 per cent. of OECD overseas investment comes into the United Kingdom. We have three times the investment of France and six times that of Germany, and that is something of which we should be proud. It shows that there is confidence in the strength of our economy which has not been echoed by the Benches opposite.

The Financial Times carried out a survey of the top companies in Europe; 181 of the 500 were British, 63 French and 63 German. We have what I believe is a proud record. We have problems; we are all sorry about the consequences of the recession and everything possible should be done to alleviate them. We have a sound and healthy economy. The only thing that would spoil it is if the Benches opposite were to become the Government.

5.56 p.m.

Lord Houghton of Sowerby

My Lords, I extend my warm congratulations to the noble Lord, Lord Rodgers of Quarry Bank, not only on his maiden speech but on becoming a Member of your Lordships' House. He brings all the qualities which fit him to make a notable contribution to those things that your Lordships' House does best. I am sure that he will add to the quality of our debates in times to come.

In looking at the problem of the economy, I have wondered whether it is worthwhile giving a glance to others who may be in the same boat. I find that it is a pretty big boat, containing many countries and millions of people. We talk about our economy—probably it suits us politically to do so—in terms of the mistakes and fumblings of government. But forces have been at work which transcend anything that governments could do to keep economies in balance, where there is a free society open to those forces. The biggest was the monstrous tribute imposed on the world of oil usage by the monopoly power of the OPEC countries. That lies at the root of many of our problems today. It let loose on the world's money markets a great deal of the spare resources which had been demanded and yielded by economies of countries all over the world. They were used to finance many non-viable enterprises.

However, let us look at the present default on borrowing. Banks are going, countries are going, individuals are going. That suggests that we have all become too laden with debt. It seems to me that debt is justifiable if one borrows money which will yield an added value and which will enable one to service and repay the debt. If we observe that condition when we borrow, far less borrowing would be undertaken. At least that situation would represent the reality of the use of money and of borrowed money. We must attribute a good deal of our difficulties to easy borrowing. That is also the case on the domestic front. There is scarcely a household in Britain which, over the past few years, has not taken advantage of loans, hire purchase and other so-called easy means of acquiring goods or services. As I have said, if people default on those loans, that would have serious effects upon morale and upon the economy.

Let us look abroad for a minute or two and look at Canada. Let us put the European countries aside for a moment and consider kindred spirits who follow Western traditions and our form of representative government. Canada is usually a follower of the Gladstonian tradition of peace, retrenchment and reform. In its recent adjustment to economic difficulties it has decided, among other measures, to bring home 8,000 troops from Europe. That move of course startles NATO considerably. We also have troops in Europe. The future of NATO concerns us all, but we cannot continue to maintain multiple defence expenditure when there is no obvious purpose to defend and when there is no obvious person to attack.

Canada has also decided to assail, to some extent, some of its social benefits. Canada's benefits have been the highest benefits in the world. The benefits are non-contributory and non-taxable social benefits. However, Canada is now continually chipping away at family allowances which have been at a high level for the past 47 years.

In Australia a measure has been introduced which is known as Keating's kick start. That constitutes a package of measures which have been introduced in the past week. Behind that introduction lies an astute political purpose. Mr. Keating has introduced immediate measures that are of great importance to many households in Australia. He has accompanied those measures with firm promises of what he will do to reduce the incidence of direct taxation, if only he is re-elected in 13 months' time. He will then embark upon a four-year plan of economic recovery in Australia.

Mr. Keating has some bright ideas as regards his package of measures. He has offered a cash bonus to all families. He has said he believes it will benefit the economy if families with children spend more. The cash bonus will also help families from a social point of view. A one-off cash bonus is to be paid to every family in Australia. In addition, those who receive the family allowance supplement—that is our form of social security—will receive additional permanent increases in their benefits. Those are to be given on top of the cash bonus. That is quite a novel idea. Mr. Keating is also lifting some product taxes. We have a product tax on motor cars. There is at present no general interference in Australia with the level of taxation, although interest rates there were reduced last November and are now lower than our interest rates. However, until last November the interest rates in Australia were much higher than ours.

The steps I have just described are dramatic steps. It also appears that a Labour Prime Minister in Australia is in a better position to persuade the Australian trade unions to knuckle down on their pay increases than our politicians here. The Australian Prime Minister says he has obtained agreement from the Australian trade union movement not to press for pay increases that are higher than the kind of average pay increases that are being awarded in countries that are Australia's competitors. That is an orderly affair. Out of the measures introduced in Australia will come immediate benefits to a large number of people. Some pensioners and unemployed people will also benefit from social improvements.

Australia will borrow but it will borrow for capital expenditure. Australia, of course, has plenty of room for capital expenditure and that expenditure can be visibly employed in Australia. Those measures taken together, and a few other interesting details, constitute a new approach.

I should not be a bit surprised if Prime Minister Major does not do something now and leave something else to be done in the next Parliament. He will not get a Finance Bill through that contains a lot of complicated detail. He will want to get a Finance Bill through before Parliament is dissolved. However, he will want the country to know that he proposes to do other things if he is re-elected. He will want the country to know that another Finance Bill will be introduced later in the year to implement the other measures he proposes to take. I cannot tell the Prime Minister anything about political skill and strategy. The measures I have just outlined are the kind of measures politicians take. Such a strategy may well be the best way to introduce measures of considerable importance. My time is up. I hope it has been interesting to your Lordships to hear what is happening in countries outside the United Kingdom. We should stop looking quite so closely and for such long periods at our own navel. There is a bigger world outside and other countries have problems too. On the whole we are a lucky people.

6.7 p.m.

Lord McCarthy

My Lords, I wish to follow the noble Lord, Lord Houghton, in repeating the congratulations he gave to the noble Lord, Lord Rodgers. I wish the noble Lord, Lord Rodgers, was in his place at present. His maiden speech was revealing. I knew that things were bad in Portland Place but I did not know they were that bad. It seems there is a higher rate of unemployment among architects than there is among estate agents. There is a significantly higher rate of unemployment among the latter groups than there is among plumbers. That just goes to show how far and wide this recession has spread.

I also wish to thank the noble Lord, Lord Peston, for introducing this Motion on the state of the economy and its social consequences. It is natural that many of us on this side of the House, particularly the noble Baronesses, Lady Hollis and Lady Hilton, should focus on the social side of the equation. I suppose it is not remarkable that no one on the other side of the House has followed the noble Baronesses on that subject. Indeed almost everyone on the other side has said they do not intend to comment on that subject. It is difficult to follow the noble Baronesses as virtually everything they said is incontestable.

It is also natural that many noble Lords on our side of the House—for example the noble Lords, Lord Hatch and Lord Peston—have focused on the unemployment side of the equation. It is, after all, the level of unemployment which is the most immediately evident consequence of the Government's economic policies. The House knows too well that we have the highest rate of unemployment of any country in Europe but two. We have the highest rate of unemployment of any country in the OECD but three. We have the highest rate of increase of unemployment of any country in the OECD and that position has persisted for some months.

Our rate of unemployment—whether one measures it on the old count or the new—is on average more than twice the rate of unemployment when the Government came to office. Therefore we on this side of the House are bound to focus in this debate on the level of unemployment. To me it is remarkable that so far noble Lords on the other side of the House have not addressed themselves to that problem.

If I understood him correctly, the noble Lord, Lord Boyd-Carpenter, said that we should think about inflation and trade union power and what the Government had done about those things rather than think about the level of unemployment. He said—and we have heard this before—that "recovery is on the way". Rather as the early Christians said that the second coming was on the way, the recovery is said to be on the way. When will it arrive and where are the signs that it is on the way?

The noble Lord, Lord Selsdon, made something of the fact that there are many other countries more depressed than we are. He mentioned Switzerland. If he looks at most of the indices of economic growth such as inflation and growth he will see that there is no reason why the Swiss should be more depressed than us. The only reason he gave was that we are more used to being depressed. That is not very convincing.

The noble Lord, Lord Joseph, and the noble Lord, Lord Brabazon of Tara, seemed to say, in so far as they addressed the problem at all, that the central difficulty was that at some time in the past the Government had taken the advice of the Labour Party and that was disastrous. On two occasions they agreed with the Labour Party—in relation to interest rates in 1986 and somewhat later in relation to the ERM. I can think of hundreds of occasions when they did not take the advice of the Labour Party. If they had taken the advice of the Labour Party rather more systematically they might be in a better position.

The fascinating point is that there is another argument in defence of the Government's policies which has been made by spokesmen in another place. I should like to ask whether the Government are still putting forward that argument. For example, the Secretary of State for Employment is still putting forward that argument, so it is somewhat surprising that we have not heard it today. That argument is that the situation is bad and unemployment is dreadful, but the situation would have been so much worse if the Government had not introduced eight employment Bills and made cuts in social services and if they had not opposed what the European Community want them to do in connection with the Social Charter. The argument runs that not only would the situation have been much worse if they had not done those things, but it would be even worse if there was a Labour Government and all that the Tory Party had done in those respects was reversed.

It is true, as noble Lords who have been in this House for any length of time will know, that government spokesmen on the other side argued that they had to abolish rights in relation to unfair dismissal for workers who have been in a job for less than two years because that would have a positive effect on employment. They argued that they had to remove protection for women and young workers in respect of night work because that would affect employment. They said that they would abolish the wages councils because it would help the growth of employment. They now oppose the working time directive of the European Commission and the atypical workers directives because, they say, otherwise the level of employment in this country would be significantly worse than at the moment.

The Government are right to link all those things. The argument that we cannot afford employment protection is exactly the same whatever form of employment protection one talks about. If the Government were consistent they would he arguing that the employer knows best in all respects. Therefore, they should go before the electorate and argue for the repeal of the Health and Safety at Work Act and the abolition of all forms of industrial injuries legislation and not just nine out of 10, as the noble Baroness said. That is the logic of their position—that employment protection of any kind restricts the level of employment and therefore one must vote for them because one will not have any employment protection.

A number of arguments can be advanced about that assertion. Essentially, once one moves away from the a priori argument and considers the evidence relating to the argument that employment protection reduces jobs. There are two methods used to settle such arguments—simulations by econometricians based on assumptions concerning the relationship between labour costs and labour demand and empirical investigations of what happens when one changes the level of employment protection.

The central point about the first of those—simulations—is that the Government's simulations, for reasons which are not entirely clear, are invariably, and especially when made by the Secretary of State for Employment, far in excess of the figures produced by anyone else. The best example is the recent study carried out by Mr. Bazen for the Institute of Personnel Management. He averaged out the major forecasting models and produced an estimate of the direct and indirect effect of the Labour Party's proposals for minimum wages on employment of some 96,000 jobs. The Treasury estimate referred to frequently by the Secretary of State claims the figure to be 750,000 jobs. Mr. Nicholls, in a Parliamentary Answer, suggested 1.4 million jobs, and Mr. Howard, in a report in The Times on 25th June, said that the figure would be up to 2 million jobs. Therefore, in the case of Mr. Howard one has to divide by a factor of 20. There is no real explanation as to why the Government exaggerate all other estimates.

Moreover, if one looks not at simulations but at the empirical evidence, one finds a considerable volume of evidence to show that when employment protection is extended, whether protection against unfair dismissal, wages councils or something else, there is no observable effect. In so far as there is any effect at all it is just as likely to improve employment as to reduce it.

Therefore, I conclude that the Government cannot say that the only justification for their policy in relation to unemployment is that it would have been worse if they had not taken the action they did because there would not have been a government destroying employment protection.

The noble Lord, Lord Boyd-Carpenter, said that recovery is on the way. Yes, my Lords, but not until after the election.

6.17 p.m.

Lord Wade of Chorlton

My Lords, as I listened to the debate I was reminded of a piece which I used to quote at one time. I have jotted it down and if I have remembered it correctly it goes as follows: "If a man runs after money he is money mad; if he keeps it he is a capitalist; if he spends it he is a playboy; if he does not get it he is a ne'er-do-well; if he does not try to get it he lacks ambition; if he gets it without working for it he is a parasite; and if he accumulates it after a lifetime of hard work he is a fool who never got anything out of life".

Noble Lords may have heard that before but I was reminded of it because how one addresses the problem depends on one's point of view. Noble Lords opposite have tried to show that this country is in financial difficulties. The reality is just the opposite.

The noble Lord who has just spoken mentioned unemployment. By 1991 we were employing more people in this country than we have ever employed in the whole of our history. We are now employing more people than we employed 10 years ago. The opportunities for more people to be employed has grown enormously with the range of jobs now offered.

The noble Baroness, Lady Hollis, painted a picture of a country which is far from the reality in the area in which she lives. Cambridge has expanded and invested—as has Peterborough—at a level which is unprecedented. The growth of investment, job opportunities and exports from those areas are now at levels which were never dreamt of 10 years ago. It is true, as many noble Lords have said, that over the past two or three years there has been no growth, but growth in the middle 1980s was unprecedented and a couple of years ago was very high indeed and there was need for a slight adjustment.

As the noble Lord, Lord Houghton, rightly said, in the world economy in which we have to operate and in which growth was running at 4 per cent. only a couple of years ago, there has been nil growth, excluding EC countries, over the past 12 months. That is likely to continue for the next 12 months. We have to operate within that economy. But that does not mean that we do not have to look forward to see how we can ensure that the economy of Britain is competitive with the rest of Europe, that we take full advantage of our opportunities and that we continue to grow.

I agree with the noble Lords opposite who have shown concern for those who are not able to obtain employment. Although there are more people employed than ever we expected, there are still many who cannot find work. What concerns me most is that many major companies which are shedding jobs to maintain their efficiency are getting rid of people of very high calibre who have enormous ability to provide wealth and opportunities for the country. I believe that we must address ourselves to that area.

The noble Lord, Lord Peston, said that he agreed with our entry into Europe and the need for a stable European currency. I agree entirely with him. I believe that if our export companies are to develop their opportunities in the world, it is absolutely essential for Europe to have a stable economic and financial system. Without that they cannot take the long-term investment decisions that are necessary.

I believe that it was the noble Lord, Lord Jenkins, who mentioned the wrong attitude of short-termism. Short-termism is created because companies do not have the long-term confidence in financial structures to be able to take a long-term investment view. In my opinion that is essential. As we move into Europe, we shall have a tighter structure of finance, exchange rates, interest rates and currencies generally. As they become more fixed, companies will have to become more flexible in other areas. One of the inevitable consequences will be flexibility in employment.

There is already a great move in that direction. Companies which traditionally have sustained a level of employment necessary for their peaks of production are now maintaining employment for the troughs of production and bringing people in and out to cope with the difference. If that change comes about and there are many very able people who do not have long-term opportunities within existing businesses, there will be only one way forward. We must encourage much more investment to utilise their skills. I think that every speaker so far has agreed with me.

On the other hand, automatically we seem to put obstacles in the way of the very investment that we want to achieve. I have heard in this House many noble Lords utter their concern about the levels of growth of investment. Yet to solve the social problems to which many speakers have referred we have to create in our society the wealth to deal with those problems. In the North West, from which I come, there are new hospitals, new schools and new opportunities which are unprecedented. During the boom periods in the middle 1980s we were able through development and investment to generate the money which made those things possible. Once we take our eye off that ball and stop saying that growth, investment and an increase in our economic base should take place every year, very rapidly the picture changes.

The noble Lord, Lord Joseph, frequently refers to the entrepreneur. The entrepreneur is the very person who is prepared to take personal risks. It is not easy to sit around the kitchen table and decide to put one's house at risk by moving into a business which, if it works, will bring wealth and opportunity for the family but which might go down the tubes. I have made such a decision on a number of occasions. Some enterprises have gone down the tubes but, thank God, not all of them.

However, if there are no people to do that or if entrepreneurs are not confident that the full weight and enthusiasm of the nation is behind them, either those people will go somewhere else or they will not undertake the business at all and generation of wealth does not take place. I believe that we have the answer to the problems with which the noble Lords opposite are quite rightly concerned. We have many skills that we do not use. We have to compete in the greater world to which the noble Lord, Lord Houghton, referred. As a nation we must make economic growth our prime priority. We must put all our efforts into it. We must not put up barriers of planning which prevent people from taking action. We must not cut back on the construction of roads and economic developments just because there might be some little birds which might be affected. We must take the overall view as a nation to generate growth. By doing that we shall create the wealth which will make it possible to solve those problems. We shall then be able to improve the environment rather than use it as an argument to prevent growth.

I believe that that is the way ahead. If we take that view, the opportunities for the nation will be staggering. Having undergone the sacrifices entailed in moving into Europe we can now use that market-place and go on from there into the world. We can develop and continue to grow in employment and investment at an unprecedented rate and during the 1990s have that level of growth which we had in the mid-1980s.

6.26 p.m.

Lord Jay

My Lords, in congratulating the noble Lord, Lord Rodgers, on his speech, I compliment him in particular on not having told us that economic recovery was just around the corner, as did the noble Lord, Lord Boardman, more or less. Unfortunately for the noble Lord, throughout last year the Chancellor of the Exchequer told us repeatedly that recovery was just beginning. On 19th March 1991 he said that there were good reasons to expect that the recovery would begin around the middle of the year. On 29th April, which is nearly a year ago, he said that recovery was around the corner. On 9th October, even more oddly he said that the green shoots of spring were appearing once again.

Meanwhile, those who believed that joining the ERM at the end of 1990 at a grossly overvalued rate would mean intense deflation, took a rather different view. I am not being wise after the event. On 16th February last year I said in this House that with a fixed ERM rate interest rates would stay high, factories and industries would close and unemployment would reach 2.5 million by the end of 1991.

What in fact happened over that period? We now know that in 1991 total national output fell by 2.5 per cent. Since early 1990 the fall has been as great as 3.7 per cent., which is a disastrous result. The only puzzle is that so many people are surprised by that fiasco. It was quite inevitable, in the already weak state of our economy, that fixing a 20 per cent. overvalued exchange rate would produce a collapse. We are now suffering not just from a world recession which has been mysteriously visited upon us by Providence, but from a recession which has been aggravated by man-made inflation caused by the uneconomic exchange rate and the Government's resulting policies. An overvalued exchange rate means high interest rates, flagging investment and flagging exports —exports flagged only last month—and therefore falling output, rising unemployment and, in this case, a balance of payments deficit, all at the same time. We are suffering from all that.

Having failed to understand the effects of their policies, the Government now say that the situation has nothing to do with them. But, strangely enough, as noble Lords will remember, the Prime Minister, when Chancellor of the Exchequer said: "If it isn't hurting, it isn't working". That implies surely that he intended it to hurt. Indeed, the present Chancellor of the Exchequer said that high unemployment was a price well worth paying. That surely implies that he intended it to occur.

The Government state that others are suffering as well as ourselves. Certainly France and Italy have 10 per cent. unemployment. That is very much the same as ours. However, that is largely because their currencies are also fixed by the ERM against the deutschmark. In fact the ERM is forcing high unemployment on all its members other than Germany. The economist, Mr. Christopher Dow, who spent some years at both the Bank of England and the Treasury, an impressive record, states: The nailing of currencies to the DM is now crucifying the policy of Germany's neighbours Italy and France as well as the UK". All 20th century experience—and experience is really a better guide than ideology—proves the importance of the exchange rate for a country like the UK which exports and imports about 30 per cent. of its GNP and proves the damaging effect of overvaluation. In 1925 a 10 per cent. overvaluation of the pound led to six years of unemployment. After realignment in 1931, the UK economy enjoyed five years of steady advance in real GDP. Manufacturing output increased 50 per cent. in those years. That is a solemn thought. The move to a competitive rate in 1949, we can now see, gave the UK uninterrupted growth and very low unemployment throughout the 1950s and very few rises in prices. Indeed, it brought the whole dollar and sterling worlds into better balance.

Similarly the gross overvaluation which this Government permitted in 1980 was one main cause of the intense depression and unemployment of 1980–81. We can now see that one real main cause of the 1988–89 recovery in production was the fall in sterling against the deutschmark in 1985–86, a year or so before. Indeed, it is not often remembered that Germany itself had the sense to devalue with us in 1949 and has very cleverly maintained its rate at an undervalued level ever since.

I give one illustration. A glaring example of the effects of the exchange rate on us is our vital coal industry which government policy at present is so seriously undermining. We are told that British coal cannot compete with imports. But if the sterling rate were at a competitive level, the British industry at the moment could compete even with a heavily subsidised Germany industry and with our own nuclear power industry. It is absurd to condemn an industry because the rate of exchange makes it uneconomic.

As a result of the present exchange rate, the UK economy is now running, at the very least, at about 10 per cent. below productive capacity. That means that we are throwing away about £60 billion or £65 billion worth of GDP every year—and, incidentally, £25 billion or £30 billion worth of government revenue. We have let that happen through our policies. We then argue about £1 billion or £2 billion more or less in the budget.

Some people seem to have forgotten that deflations are cumulative. Every time 1,000 people are thrown out of work, their purchasing power is reduced, their spending is reduced and another group loses its jobs in turn. The decline does not necessarily stop by the hand of politics. The great depression in 1933 did not stop until the United States Government took very drastic action. It is worth remembering that 19th century British cyclical depressions did not end until the bank rate came down to 2 per cent., and sometimes even below 2 per cent.

It is nonsense to say that if the exchange rate were set free interest rates would still have to stay at their present levels. If that is the problem the solution is to reduce interest rates and to let the exchange rate find its own economic level. By depriving us of the interest rate weapon, the fixing of the present uncompetitive rate was really an act of unilateral disarmament by this country. As long as those rates are maintained I believe that we are condemned to having 3 million unemployed and a balance of payments deficit at the same time. Whatever government are in power, the change to a competitive rate will have to be made. I believe that the longer that that is delayed the greater damage will be done meanwhile.

6.37 p.m.

Lord Rea

My Lords, one effect of this Government's economic policies has been to widen the gap between the income of the richest and poorest sections of the community, and unemployment has been allowed to reach higher levels than at any time for 60 years. My noble friend Lady Hollis has graphically described the situation, I believe very movingly.

It is true that absolute poverty has been mainly avoided through the operation of the social security system. But relative poverty and unemployment, as I hope to indicate, have detectable and important effects on health. Nine years ago I based my maiden speech on the Black Report on inequalities in health, published in 1980 but largely ignored by the Government. In fact it was issued only in limited numbers in a typescript version because it made uncomfortable reading for the Government. However, the Pelican edition was extremely well received and was widely praised for its scholarship and recommendations, almost none of which was accepted by the Government.

Professor Black's working group wrote the report because it had been asked in 1977 to consider the wide and apparently increasing gap in health between the different social classes in Britain, a problem which had much concerned my noble friend Lord Ennals while he was Minister for Health. In 1987, an update of that report entitled The Health Divide —Inequalities in Health in the 1980s, another work of high quality, commissioned and published by the Health Education Council, also found some difficulty in reaching the light of day, or the light of the reading lamp, due to official disapproval. The story is interesting, but I have only 10 minutes in which to speak. That report and a number of more recent studies show that although the overall health of the people of this country is gradually improving, the gap between the best and the worst off is increasing in health as well as in wealth.

It is therefore disappointing that the Green Paper The Health of the Nation failed to face squarely that inequalities in our society were a basic reason for our indifferent showing in international comparisons of health statistics. The fact that the Green Paper was published at all is to be welcomed. But I am sorry that the White Paper based on The Health of the Nation will not be published before the election. I can only assume that many of the hundreds of submissions of evidence may have proved difficult for the Government to swallow and a rejection of a large part of that evidence might have proved politically damaging in the run up to an election.

As an illustration of how inequalities pull our health down as a nation, it is worth considering that basic health statistic the infant mortality rate—the number of babies that die before one year for every 1,000 that are born. Our current figure is just under nine per 1,000. In fact, it is a remarkably low rate historically speaking. The figure was over 20 when I qualified some 38 years ago. However, it is equalled by many other developed countries which have come up from behind. Some are now overtaking us—for example, Ireland, Spain, France, Italy and Germany, which used to have very poor health statistics.

A long way ahead of us, with infant mortality rates of only five or six per 1,000, are Japan, Sweden, Finland and Iceland. Even Hong Kong and Singapore do much better than the United Kingdom. The country with the highest gross national product, the United States, has worse statistics than the United Kingdom but it also has the greatest social inequalities in the developed world.

The infant mortality rates of the different socio-economic groups in the UK show that the professional groups have a rate which is the equal of Japan and the advanced Scandinavian countries. However, our average rate is pulled down by the much higher rate of the more disadvantaged socio-economic groups. Their rate is about twice as high as that of the professional group in Social Class 1. The statistics for almost all other health measures, including life expectancy, show a similar variation among the social classes.

The parallel between health and the income distribution within developed countries was examined in detail in a recent paper published in the British Medical Journal and written by Dr. R. G. Wilkinson of the Trafford Centre for Medical Research at the University of Sussex. The centre was named after the late Lord Trafford who, all noble Lords will agree, is greatly missed on all sides of the House. Dr. Wilkinson concluded: If Britain were to adopt an income distribution more like the most egalitarian European countries … about two years might be added to the population's life expectancy". He further stated: The contrasting experiences of Britain and Japan illustrate the possible effects of income distribution on health. In 1970 income distribution and life expectancy were similar in the two countries. Since then they have diverged; Japan now has the highest life expectancy in the world … [but also] … the most egalitarian income distribution of any country on record. In Britain, on the other hand, income distribution has widened since the mid 1980s". I must explain that an increase in life expectancy is not simply a question of adding a couple of years to the life of already senile people. It is associated with less chronic disease and disability throughout life and a longer active life.

As my noble friend Lady Hilton described, there is in many cities a growing under class of dissatisfied unemployed young people. Even if they take a training course, and are thus taken off the unemployment register, often they do not obtain jobs afterwards. Some members of that group escape boredom by drifting into dependency on drugs, alcohol and/or crime—crime which is often committed in order to finance an expensive drug habit. The desperate sub-culture of drug users becomes an absorbing way of life, much more exciting than sitting around while on the dole. It is estimated that there may be 50,000 opiate abusers in the United Kingdom. Nearly all are unemployed or on income support, but they each need upwards of £25,000 per annum to finance their habit. One estimate of the money spent per annum on illegal drugs is £1.5 billion.

Even if that is an exaggeration, it is clear that the cost of drug abuse is one of the central reasons for the rise in property crime described by my noble friend. This Government's attempts to deal with the drug problem, like their attempts to stop crime, are proving woefully ineffective. There is a heavy emphasis on stopping the supply rather than on reducing the demand. Radically new approaches to drug addiction and other offences, including better treatment and rehabilitation, are required. But that can be only partly effective while a sizeable proportion of our younger citizens are made to feel that they are unwanted and have been cast aside.

Instead there should be a major government initiative—"a new deal", to follow my noble friend Lord Jay—which would be appropriate. Our Tennessee Valley Authority should start building the houses that we need, as the noble Lord, Lord Rodgers, convincingly argued in his maiden speech. There should be modernisation or repair of our infrastructure which would help to make our goods competitive as the world recession lifts.

Like my noble friend Lord Peston, I believe that the bogey of inflation is not such an evil monster as that of unemployment. I am confident that as a good Keynesian he will be able, with his right honourable colleague Mr. John Smith, to find a means to avoid both evils.

6.45 p.m.

Lord Judd

My Lords, the evidence of the failure of economic and political policy as presented in this House leaves absolutely no room for complacency. We have heard of the dissipation of oil wealth, declining industrial production, a stagnating GDP, an appalling balance of payments, under-capitalised industry, diminishing reinvestment (down 15 per cent. last year), growing unemployment with all that means in wasted, despairing, broken human lives and families, falling property prices, repossessions at a record level, bankruptcies and bad debts accumulating and, as my noble friend Lady Hilton powerfully reminded us, a crime rate that is soaring.

Even more telling is the fact that we encounter daily the strains on public services; health, education and the care of the elderly and infirm. As was emphasised by my noble friend Lady Hollis, perhaps most distressing of all is the fact that we are moved, or ought to be, by the growing number of homeless people, young and old, sleeping in cardboard boxes, pedestrian subways and under bridges in almost all our larger cities. Some are sleeping almost on the doorstep of this House. That is not a reassuring prospect.

My noble friends Lord Hatch and Lord Houghton have reminded us of the wider world. Of course we are locked into that wider world strategically, economically and morally. As we contemplate our own difficulties it is perhaps as well to remember that in that world a small child dies from poverty every 2.4 seconds of every day; one in five people live on less than £175 a year; 1.5 billion people are still deprived of any health care whatever; 1.75 billion people still have no access to safe water; and 3 billion still live without adequate sanitation. Average life expectancy is 12 years less in the South than in the North. The South's maternal mortality rate is still 12 times higher than that in the North.

If all that were not challenging enough the size of the problem has been accentuated by the new needs which have become evident in the former Soviet Union and in eastern Europe. But despite the valiant efforts of the Minister for Overseas Development, whose personal sincerity and commitment are beyond question, the Government are proportionately providing 12 per cent. less of our national wealth for the battle against world poverty than they were in 1979.

Overshadowing those grim realities at home and overseas is the potentially terminal global environmental crisis. We have a damaged ozone layer, global warming, rising seas and climatic change coupled with accelerating depletion of the world's non-renewable resources. As we come up to the special United Nations Conference on the Environment and Development in Rio, Maurice Strong, the secretary of that conference, has estimated that the price of dealing with the world's environmental problems is in the region of £350 billion per year. Of that, one-fifth will need to be transferred from the North to the South.

But it is a mistake to imagine that the bulk of the environmental problems arise in the poor world. It is the insatiable consumption of resources and the reckless pollution of the planet by the industrialised world, including the United Kingdom, which relates directly to the depletion of the ozone layer and to the global warming. It is the North which is responsible for 80 per cent. of global fossil fuel use. It is we in the North who consume 40 times or more per head of environmentally exploitative goods than do the poor in the third world.

In the face of those immense challenges at home and across the world, it would be wanton irresponsibility for governments or oppositions to indulge in opportunist election tax cut drives, endeavouring to secure votes at the expense of our children and their children.

We know that education and training matter as the way to ensure that our children fulfil their potential and as an indispensable investment in our future. We know that health services matter to ensure a decent life for our parents, children, friends and family and as an indispensable investment in a dynamic and effective community. We know that good public transport must make sense on our crowded island. We know that adequately financed environmental and overseas development policies are essential for a peaceful secure world—indeed, for the survival of humanity itself.

Ideological preoccupations, purist monetarism and unbridled market economics will not provide the answers. We need a reassertion of value-based common sense and pragmatism. We need to be rid of the greed, selfishness and short-termism among too many of those in leadership positions in finance and commerce. Those have eaten away at the foundations of civilised values. We need to rediscover strength in our belonging, in our commitment to community and to society and in our social responsibilities. The private, the public, the voluntary, the employer, the trade union and governmental sectors need to come together in a positive shared responsibility to strategic long-term and economic policy, especially for priorities in investment.

To assist in ensuring a viable world community—an absolute priority for an internationally dependent nation like ours—it is clear that we must address the following issues at international level without delay: tariff and non-tariff barriers which trap the South in poverty by hampering its production of exports; ensuring access for the South to the markets of the North. We need to address the problem of dumping subsidised agricultural surpluses by the North at low production costs on world markets causing havoc to third world agricultural economies. We must tackle the need for assistance to third world countries in upgrading production, improved marketing, infra-structural development and diversification. We must look to protection and stimulation of third world agricultural production within the framework of GATT to promote food self-sufficiency in third world countries.

We must look also to the revamping of GATT and of the United Nations Conference on Trade and Development and to their possible merger to ensure an international agency, sensitive to third world global needs, geared to protection of the environment, to ensure improved technology transfers to the third world and to ensure accountability of transnational companies.

We must also give priority to far-reaching extension of debt relief, building on the welcome Trinidad terms. We must look to structural adjustment and debt relief policies designed expressly to enhance sustainable national-level food security and to encouraging popular participation in environmental rehabilitation and protection rather than programmes focused only on a short-term national economic growth rationale.

We must look also at population policy developed in the context of effective primary health and functional literacy programmes. Against all that, we must give urgent priority to less wasteful consumption and pollution by the North.

I believe that when history is written of the age in which we live, the past decade will be put down as an age of quantitative preoccupations. I believe that we are learning that the salvation of humanity cannot be founded on a quantitative preoccupation. We must reassert the qualitative dimensions in society. We are learning that social priorities and values are as essential to successful economic management as is the economic technocracy itself.

6.55 p.m.

Lord Marlesford

My Lords, I suppose that this is probably the closest we get in this House to a censure debate on the Government. We heard a highly provocative and political speech by the noble Lord, Lord Peston. I make no complaint about that. I welcome it and indeed I enjoyed it. However, I hope that in return I shall be allowed to be a little bit political.

The main difference between being in government and being in opposition is that in government, you must make choices which are often hard choices. In opposition it is possible to have the enjoyable but somewhat dangerous occupation of riding several horses at once. It does not matter a great deal to the country if you fall off. However, as we get closer to an election, it is not unreasonable to expect an opposition to have chosen one horse or another. In many areas, the Opposition have not yet done that. Those noble Lords who heard Mr. Gerald Kaufman this morning on the "Today" programme trying to explain to Mr. Brian Redhead whether or not a Labour government would buy a fourth Trident submarine will know exactly what I mean.

For many years the Tory Party too tried to ride two horses at once. They tried to control inflation while having full employment. They tried to share power with the unions and the CBI while trying to run the country. They tried to keep huge chunks of loss-making industry in the public sector while controlling public expenditure. They had taxation rates of over 90 per cent. while hoping that entrepreneurs would not leave the country. In other words, for a long time the Tory Party ran what I—and perhaps others—would describe as a socialist consensus.

I suppose that the light started to dawn after the defeat of the Conservatives in 1974. The person most responsible for removing the scales from our eyes was my noble friend Lord Joseph. The turning point was when he said to the Tory Party: Beware of the middle ground. It is like the will-o'-the wisp, constantly moving to the left". Those lessons were learned by the Tories but I am sure that they have not yet been learned by the Labour Party.

The main job of any government is to put the country into a position of comparative advantage. That includes making our industry more competitive. But that is not all. I shall review some of the ways in which, over the past 13 years, the Conservative Party has improved our comparative advantage. In doing that I shall pause to contrast what has been achieved with what, as far as it can be perceived a Labour government would do.

First, I deal with inflation and unemployment. The Government have said, "Let inflation be the judge and jury". That seems a reasonable test. Except for the Korean war, we did not reach double digit inflation until Mr. Heath's Government. Indeed, in my view, Britain's inflationary problems were initiated by Mr. Heath's government. Of course inflation got totally out of control during the Labour government which followed. There was high inflation for the first three years of Mrs. Thatcher's government: in 1979, it was 17 per cent.; in 1980, 15 per cent.; and in 1981, 12 per cent.

There were three main causes of that: first, was two years of public sector pay comparability under the Clegg formula. That was a terrible mistake; secondly, the increase in VAT which was a price well worth paying, to coin a phrase; and, thirdly, the pressures from the petro-pound. However, since then, except for 1990, inflation has been low and over the coming months I believe that there will be a further fall.

The Labour Party does not often refer to inflation and is somewhat ambivalent about it. If it does only half the things it wishes to do—in particular, large increases in public borrowing—that will probably bring about double digit inflation quite quickly. It is not always very easy to know exactly what the Labour Party would do. However, fortunately we have an excellent text to help us. It is a very good book which I recommend to your Lordships. I have brought a copy with me. It is called Choose Freedom. It is written not by Mr. Kinnock, whose memoirs I believe are still in the first draft, but by Mr. Roy Hattersley, Labour's deputy leader. Therefore it is a book of authority. It is carefully thought out and combines both philosophy and policy.

If we had any doubts as to the thoroughness with which this book has been researched, we can see in the preface that especial help and acknowledgment is made to the noble Lords, Lord Peston and Lord Williams of Elvel. The crucial philosophical difference in it is that Mr. Hattersley rejects equality of opportunity, saying: The equal start and open road are not enough". He wants equality of opportunity to be replaced by "equality of outcome". He writes: Changing the organisation of society—to produce the most equal outcome—is what is meant by 'equality of outcome'". Mr. Hattersley then goes on to deal with the crucial issue of taxation. Since the Tories came to power they have reduced the top rate of tax from 98 per cent. to 40 per cent. and the standard rate from 33 per cent. to 25 per cent. I make a special tribute to Nigel Lawson because he took the most courageous decisions on tax. At the moment the Labour Party is in an awful muddle over tax. I believe that Mr. John Smith was genuinely surprised at the political uproar which greeted his "moderate" 59 per cent. marginal top tax rate. It is of course moderate in comparison with 98 per cent., but I fear that the electorate do not see 59 per cent. as moderate in comparison with the present top level of 40 per cent.

Mr. Kinnock may well be confused by all this, but Mr. Hattersley will be there to remind him where his duty lies. He writes: A socialist government committed to real equality will clearly embark on a massive programme of redistribution, confident it is more likely to improve overall economic performance than to depress it and certain that it will produce a more efficient rather than a less efficient use of resources".

Lord Jay

Quite right.

Lord Marlesford

I am so glad that the views of the deputy leader are so loyally followed by the noble Lord, Lord Jay. Who can seriously doubt that the privatisation of such industries as British Airways, British Telecom and of electricity distribution has been a success. I declare an interest but claim no credit— I am a director of Eastern Electricity. But wait; Mr. Hattersley again has a view: Public ownership, in the form of state corporations centrally owned, planned and administered, is essential for the public utilities". Surely, noble Lords opposite realise by now that a privately-owned company can go to world capital markets without adding to the PSBR; that it is far easier for government to regulate, in the interests of the consumer, the employees and the environment, a company which they do not also own.

Finally, perhaps I may express my own deep concern for the effects of the recession on jobs, houses and small businesses. I blame to a considerable extent the banks for their contribution. In short, they have lent money when they should not have done and they are now looking as though they are not able to lend money when they should do so. I believe that it was the noble Lord, Lord Houghton, who made a similar point. One of the most immoral slogans that I have ever read came from a credit card company which said that their card "takes the waiting out of wanting". That is very bad advice.

In this country there has been a tradition for borrowers, particularly individuals and small business people, to assume that the banks, in making a loan, assess the credit-worthiness of the borrower. They believe that if a bank will lend, then it is prudent to borrow. The trouble is that the bankers have been looking at underlying assets instead of the borrowers' cash-flow capability for servicing and repaying the loans. Thus they have lent money against the security of absurdly high property prices. Now I fear that the banks are looking at their own ratios and calling in loans at just the time when they should be extending them. I am worried that we may in fact be faced with a liquidity crisis at a time when recovery is coming. That is why I believe that the Chancellor must do his bit next week to counteract that risk.

I would like to make some suggestions. I know that it is probably too late because the Chancellor has probably made his decisions, but someone somewhere might hear them. He should reintroduce, on a temporary basis, probably for two years, 100 per cent. capital allowances which were, unwisely in my view, reduced to 25 per cent. by Mr. Lawson. I would extend these allowances from merely plant and machinery to buildings as well. I would also extend, again on a temporary basis, VAT zero rating to expenditure on improvements to both commercial and domestic premises. There might be some difficulties of definition and thus some leakage, but it would, again to coin a phrase, be a price well worth paying.

I have a few words to say about the ERM. Of course there is a conflict in using interest rates to maintain parity in Britain at a time when it would be useful to cut rates to stimulate demand. That was a problem for three decades when we were tied to the Bretton Woods agreement. That is the main reason why Mrs. Thatcher was so reluctant to join the ERM. But we do not now have a realistic option of coming out; therefore my view is that the sooner we can move to a single currency, the better.

7.5 p.m.

Lord Desai

My Lords, I was going to speak about all kinds of noble things; social, ecological and so forth, but the speech of the noble Lord, Lord Marlesford, with whom I am normally twinned by the normal channels, is too tempting to let go. He said that inflation should be the judge and jury. Therefore, I shall talk about the inflation record of this Government.

This Government have twice doubled the rate of inflation. They have caused recession twice; one the deepest and the other the longest recession. They have doubled the rate of VAT. When noble Lords opposite talk about taxation, they never talk about overall taxation, which has gone up; they speak only about direct, personal income tax. We have to remember that the burden of taxation in this country has not gone down. The average level of unemployment has trebled between the 1970s and the 1980s. Despite that, the inflation record of the Government over 13 years is so abysmal that even now they have to go on saying "Wait a little longer and we will do better".

Perhaps I may remind noble Lords that when the Labour Party left office the inflation rate was 10 per cent., though it had been slightly lower before. Mrs. Thatcher soon made it 20 per cent. It is also very interesting to note that noble Lords opposite quote annual rates of inflation when talking about their record and the quarterly rate of inflation when talking about ours. The four quarter rate of inflation—that is to say, inflation in one quarter over the previous quarters—was 20 per cent soon after Mrs. Thatcher took office.

The problem was not the petro-pound as the noble Lord, Lord Marlesford, said. In any case an overvalued pound should cause deflation and not inflation. Despite the petro-pound we had one of the highest rates of inflation in OECD countries. We shall forgive that. That inflation was brought down to 3.5 per cent. at a horrendous cost in terms of unemployment. What happened then was entirely predictable. While congratulating my noble friend Lord Peston in raising this topic, I must berate him a little for being too kind to Mr. Nigel Lawson. The problems that we have were not caused by Black Monday and what followed, but by electionitis which often hits Tory Chancellors rather severely. It hit Mr. Maudling and Mr. Barber rather severely, but we shall not talk about them. It also mildly hit Sir Geoffrey Howe, but we shall not talk about that election.

In the Autumn of 1986, the Chancellor, openly abandoned monetarism, in a speech at the Mansion House no less. The Financial Times had a headline, Monetarism is dead—official". A £4.5 billion addition to the PSBR was inaugurated by Nigel Lawson for the simple reason of winning the next election. Keynesiansm had been rediscovered. It had been taken out of the cupboard and harnessed to the needs of the Government. Any faint parallels with the current election are, of course, entirely accidental. Every time an election comes about the Conservatives discover the virtues of Keynesiansm and the entirely sound logic of borrowing money. After the election fiscal prudence rules the roost. But the great thing about Nigel Lawson, the unassailable Chancellor and the hero of the Conservative Party conferences of 1987 and 1988, was that he did not stop after the election. He not only gave tax cuts in 1987, but also in 1988. That is an innovation in political democracy. We have had bribed electorates before an election, but to do so after an election is an entirely new development. Therefore, it is not so much that interest rates were cut in the wake of Black Monday that mattered. The seeds of the current crisis were sown in the Autumn of 1986. They were further fuelled in the Budget of 1987 and fuelled still further in the Budget of 1988, where the most horrendous bribe of double mortgages was given.

Let us remember another great Conservative story, which also happens every 20 years or so. It is the great belief that somehow the British economy is badly off because of restrictive practices; that we need freedom. The noble Lord, Lord Barber, when he was Chancellor, decided, with the help of my colleague and friend, the noble Lord, Lord Griffiths, that the City was too bound down by restrictions. He decided that competition and credit controls were needed. Two years later the Bank of England had to have a lifeboat for the number of secondary mortgage companies which had profligately given credit. That was done by a fiscally responsible, financially prudent government. It happened again in 1986 and 1987. We were told that deregulation—the big bang—was the order of the day; that it was virtuous to have de-regulation. It is immoral, it is greed, but we shall not go into that. Freedom was the great thing. We were told that if we did not have de-regulation in the financial services industry we would be very backward compared with other countries. De-regulation was openly adopted by this Government. Now Mr. Lawson tells us, five years later, "Oh! I didn't quite realise that while I was Chancellor £150 billion worth of credit was released in one year by equity withdrawal from the housing market". It was well known. At the time people said we should not have done it. The National Institute's Economic Review, a Keynesian journal, stated in March 1988—noble Lords can check it—that a reflationary budget for 1988 would be ill-advised. A Keynesian review had advised, "Do not inflate now". What happened? The economy was further fuelled.

Lord Joseph

My Lords, I am grateful to the noble Lord for giving way. I cannot resist a slight recurrence of the House of Commons practice of intervening occasionally. How does the noble Lord reconcile his blame of the then Tory Government for a £4 billion relaxation on tax grounds with his legitimate worry about the huge, much larger, much more immense effect of £150 billion, he says—I think wrongly, by a factor of two—increase in credit? Surely it was the credit release that influenced the later inflation. I am amazed that the noble Lord ignores the lags that always follow the cause of inflation, before inflation arrives, when he so frivolously blames Mrs. Thatcher's Government for the fourth quarter level of price rises, which was a consequence of the inheritance from a Labour Government.

Lord Desai

My Lords, I thank the noble Lord for that. I would have liked to make similar remarks about the inflation rate of 1975, which is frequently mentioned by noble Lords opposite. They have talked about the lags and about OPEC. But fair is fair and this is politics. It is not just the £4 billion worth of tax cuts, plus the double mortgage scheme. We all have the knowledge that the housing market is a major distortion. Of course, all the great belief in market stops when it comes to housing market distortion. Despite knowing all that, the prudent Chancellor acted the way that he did. That is what invited inflation. Do not tell me that Finland is depressed. The knowledge of geography on the Benches opposite has gone up immensely lately. Inflation has been found in every country. All the problems of this country were created here by Conservative Chancellors who irresponsibly abandoned any financial discipline and caused the current crisis. This is a debt deflation crisis. Debts were encouraged by Chancellors of the party opposite. They have landed this country with a severe depression from which I fear it will take a long time to emerge. Unfortunately, it will be my party which once again will have to cure the country's ills, but I look forward very much to the challenge.

7.17 p.m.

Lord Pitt of Hampstead

My Lords, I am very pleased to be following my noble friend Lord Desai. In fact, I had intended to use my few minutes to talk about the housing situation, not in terms of homelessness but the actual economic consequences of housing policy. I should like also to congratulate and thank the noble Lord, Lord Rodgers of Quarry Bank, on his maiden speech. The two speeches have given a good introduction to my speech.

There is a growing awareness of the impact of our housing system on the British economy. I am sure that the noble Lord, Lord Joseph, will recognise that.

Housing is the tail that wags the economic dog. The housing market led us into recession and it is my view that it will keep us in recession. That is not an incidental feature of our crazy drive into owner-occupation. It is the inevitable outcome of a housing policy which has put the dogma of ownership above a commitment to house all our citizens. That is the real problem. We have become a nation of price speculators. We now invest in housing and not in savings that can he used for productive investment. The present savings ratio has fallen from 9.7 per cent. in 1985 to 6.8 per cent. in 1991. Our savings ratio is very low in relation to our European neighbours who have continued to invest in areas of wealth creation. That phenomenon goes a long way to explain our balance of payments deficits. As noble Lords know, these deficits are getting larger and larger at a time when our trade should be in surplus.

Primarily as a result of de-regulation—that was mentioned by my noble friend who has since left the Chamber—we borrowed to buy housing. But we did not stop there. We borrowed against our increased housing wealth. Our houses were worth much more so we borrowed much more and then we spent. That is a basic fact.

In a report by the Joseph Rowntree Foundation it was estimated that in 1988 we borrowed and spent £16.4 billion in equity withdrawal from housing. That contrasts with less than £1 billion a decade earlier. That is why the Chancellor has had to keep interest rates high. He had to control borrowing and spending. For the past eight years our nominal short term interest rates have been continuously higher than those of France, Germany, the United States and Japan.

The price is being paid in terms of the erosion of investment in our manufacturing base, on which recovery depends. We are now paying a high price for this in terms of housing policy. In 1991 there were 75,000 repossessions and I am told that the figure is set to rise again this year despite the Government's attempt to paper over the cracks with their mortgage rescue packages. However, there are other side effects of our housing policy. Labour mobility is restricted. High rents and high construction costs as a result of speculation in land also feed through into wage inflation. My noble friend Lord Desai was right on that point.

How bad these effects of our housing policy will be depends entirely on the stage we are at in the economic cycle. What we have in the housing industry are booms and busts as in the economy as a whole. The housing industry at the moment is going through a period of bust. The destabilising effects of our housing system on the whole economy have been compounded by the reductions in public sector house building. At the start of the 1980s the public sector accounted for 40 per cent. of house building. By 1990, the share had fallen to 10 per cent. Public sector house building allowed building companies to plan effectively for a cost-effective output. However, at the present time the building industry needs a crystal ball to predict what it will be able to sell and at what price. We need that steady market of house building through the public sector. But now we have the uncertain market and an inability to respond quickly. If the current uncertainty continues there is no way in which companies can equip themselves to respond to the need. What is more, the boom and bust cycle encourages short-term fluctuations in a market that needs stability.

The collapse of the private building programmes, the bankruptcies and the unemployment of the past year are the inevitable consequences of this housing system. It can only be avoided by insulating housing investment from the economic cycle. We must give serious thought to doing that. That would produce more stability in the industry and better value for money. If we wish to have a sensible economic policy the reform of housing finance must be a key factor.

With the gloss temporarily off the house ownership mania we have a short period in which, by careful planning and adopting the right policy, we may be able to change course. I hope that we shall do that. I have often spoken in your Lordships' House about the consequences of homelessness. The more I have learnt about housing and housing finance—I have learnt a good deal over the past 12 years—the more convinced I have become that getting housing policy right is not only socially just but economically essential.

My time is up and I shall not delay the House much longer. We can and should have a stimulus by providing new houses. A report of the Institute of Housing recently suggested that every £1 million invested in new houses or renovations creates 50 new jobs. It went on to say that if 100,000 new jobs can be created overall, something over £750 million would be gained by the Exchequer. I hope that everyone who is concerned about our economic situation will think about that.

7.26 p.m.

Lord Kagan

My Lords, perhaps a big contribution could be made to the well-being of the economy if it could be taken out of the political arena. I do not think that it is within the ability of any single party fundamentally to solve the problems. Since the last war every government, when faced with having to adopt painful, difficult or unpopular measures, have had to decide whether to do what is economically right, which looked like political suicide, or what is politically right, and then hope for the best on the other side. This weakness does not apply to Germany or Japan. That is one of the fundamental differences in their performance.

Dictatorship has been discredited, as we have seen in the East, but democracy has not yet quite proved its competence to deal with its problems. Our debate should be not so much about "Who has done it?" but "What is to be done?". The diagnosis, whether we are in good circumstances and everything is lovely or whether we are in a trough, is not so difficult. Forty years ago, just after the war, we were the number four industrial power. Now we are number 26, just above Greece and below Spain. We have gas, we have oil, we have coal and we have unrivalled know-how. We have a wonderful banking system in the City. The Germans have no gas, no oil and no coal. The same is true of the Japanese. Their surpluses are bigger than our deficits. Do we need any more analysis in that regard?

After the war we were in the front row of the industrial arena. Now we are in the stalls—not, it is to be hoped, stalled—but where are we heading? An important component in the economy is labour. Ford in Britain manufactures 11 cars per man year. Rover manufactures eight cars per man year. Nissan—and this is the difference between Japanese management and British management—manufactures 26 cars per man year; and in the new Derbyshire plant of Toyota it is planned to produce 52 cars per man year. Yet the Nissan managing director is on record as saying that, having introduced its methods (which have been accepted by the carefully recruited people), the company finds that the British labour force is every bit as good and even better than the Japanese labour force in the core factories in Japan.

Therefore, is the decline that we are suffering inevitable or is it self-inflicted; and, finally, is it reversible? Let us look at the other component involved, which is capital. German banks invest while our banks lend. The difference in that involvement is that German industry and German managers can plan long term, while here we have to plan in the short term, depending on the City's opinion almost every morning. Yet we have some of the best know-how and innovation of any industrial nation. But, unfortunately, it is being exploited by the Americans, partly by the Germans and by the Japanese.

In Germany money is invested, money is made and wealth created in production. But here it is more a matter of buying and selling shares; in other words, paper transactions. If noble Lords will permit me, I shall briefly recall a joke. Two crofters were lamenting their financial problems in the pub. The publican revealed that he made 50p profit on every pounds-worth of Whisky. Suddenly Jock said to Mac, "I have the answer. We will go home and find the deed to the croft. We will pledge it and buy two big cases of whisky and take them home. I'll sell you a tot and you can sell me a tot and by the time we have finished we will have made a fortune". That is how the British economy works so far as concerns wealth creation.

In my opinion, the situation is as serious as the war, despite the fact that there is no gore and no blood. It needs the same approach and the same support that the War Cabinet received. For all our sakes, I hope that some day we shall get an economic Churchill and a wise, co-operating, economic Attlee.

7.34 p.m.

Lord Ezra

My Lords, as other noble Lords have said, my noble friend Lord Rodgers of Quarry Bank made an impressive and practised speech during the course of the debate. He raised many important issues, some of which I should like to return to. The purpose of the debate, introduced with his usual vigour by the noble Lord, Lord Peston, has been, to call attention to the state of the economy and its social consequences". The time has come to try to draw some conclusions. Unfortunately, there is little doubt about the state of the economy. As many noble Lords have said on both sides of the House, Britain is now going through the longest running recession since the war. Output has fallen, investment has fallen and the trade balance has worsened. As the noble Lord, Lord Joseph, accepted in his carefully considered speech, the recession in Britain started before other countries began experiencing economic difficulties and was not identified soon enough. Now that other countries are also in recession, the situation in Britain has been exacerbated. As the noble Lord, Lord Boyd-Carpenter, reminded us, it is perfectly true that inflation has been brought down and there has been some reduction in interest rates. But the impact of those measures has not been near enough to offset the recession.

The social consequences of the parlous state of the economy are clear. There has been high and rising unemployment. There is a high level of personal indebtedness, leading to much human suffering and anguish. That point was made by the noble Baroness, Lady Hollis, and by my noble friend Lord Cobbold. There is a high and continuing level of repossessions, leading to an increase in the already unacceptable number of people without proper homes. The noble Lord, Lord Boardman, referred to that fact.

All political parties are committed to bringing the recession to an end and to alleviating the social problems which it has created. The question is how to do that effectively and in such a way as to avoid leading to a further recession in due course. Trade cycles of some sort are no doubt inevitable. But Britain has suffered from a series of deeper recessions than other developed countries in recent years—an issue referred to by my noble friend Lord Rodgers. That has undoubtedly weakened the economic and social fabric of the country. The noble Baroness, Lady Hilton, specifically mentioned the latter.

One way of trying to end the recession is to take measures to stimulate consumer spending. It is argued that such measures would in turn stimulate production and thus work through the economy. But, in my opinion, that reasoning is fallacious, despite the Australian example quoted by the noble Lord, Lord Houghton, in his, as usual, stimulating speech. The recently published trade figures for January have shown that even in a period of deep and continuing recession imports remain at a high level, while exports have unfortunately diminished. That point was specifically referred to by my noble friend Lord Jenkins of Hillhead and by other speakers. It is, therefore, clear that much import substitution is still continuing. A resurgence of consumer demand would almost certainly have the effect of increasing the import bill and worsening the current account balance. Thus, before a major stimulus is given to consumption, there should be a stimulus to investment in industry and the supporting infrastructure.

Possibly the major economic problem besetting Britain is the inadequacy of industrial capacity. The problem has been masked to some degree in recent years by increases in productivity. Increased productivity is obviously welcome. The gap between British and German productivity, for example, has been substantially reduced. But a recent survey has shown that the main remaining differences in industrial policy between the two countries is the consistently greater level of investment in people, in research and in plant in Germany than in Britain. Increasing productivity on a diminishing base will not provide the answer to Britain's economic problem.

Thus measures to increase industrial capacity have become a priority. The noble Lord, Lord Wade, emphasised the need to encourage industrial investment. Now is the time for a whole range of measures to be taken. They include increasing capital allowance, as proposed by the noble Lord, Lord Marlesford, cutting the uniform business rate and, above all, providing special help to small businesses that have suffered worst in the recession. There should also be a further stimulus to training, and research and development. There is a risk that in periods of recession business expenditure on these items is cut back. The Industrial Society, in a recently published report, has provided evidence that substantial retrenchment on training is already taking place. That view was confirmed by my noble friend Lord Rodgers in regard to the architectural profession. There is also evidence of a cutback in R&D. These trends must be reversed urgently.

Measures to stimulate industrial activity should be accompanied by measures in the infrastructure. Some attention is already being paid to that. In particular, in view of the dire straits of the construction industry, to which many noble Lords have referred, it is urgent that more of the accumulated capital receipts from council house sales should be released. That is not only economically but also socially desirable. A proportion of these resources should be devoted to improving the declining standard of much of the existing housing stock. Transport is another area requiring urgent attention. While measures have been taken to increase investment in public transport, everybody agrees that much more needs to be done. In particular, the railways should be made free to borrow from private sources in order to top up what is made available to them from public sources.

The country is not only facing a major political choice in the forthcoming election. It is also facing a choice in economic and social policies which can determine prospects for many years to come. The vital issue is to ensure that we come out of the present recession in a way which is sustainable and does not contain within it the seeds of the next recession.

7.42 p.m.

Lord Donoughue

My Lords, I see that we are underruning on our time and I am happy to use some of that time to congratulate the noble Lord, Lord Rodgers, on his powerful maiden speech. I worked with him in politics over 30 years ago and am aware of his skills and of the robustness that he has demonstrated today. He reported that one in three architecture students have no professional prospects; they have qualifications without employment. The same bleak future faces so many of our children.

We are discussing a most curious as well as a painful recession or slump—because it really is a slump and we might as well call a spade a spade. It is curious because for long after the statistics showed that it had arrived, with growing unemployment, bankruptcies and housing repossessions, the Prime Minister denied its existence. Then when he finally admitted its presence as Chancellor in November 1990 he announced its immediate departure. He categorically forecast that it would be the briefest and shallowest downturn on record, that it would end in the first half of 1991 and that the economy would then rebound at a miraculous annual rate of 4.3 per cent. Remember that? Well, how wrong can you be? The slump is sadly still with us and is getting worse according to the latest industrial trends survey from the Confederation of British Industry.

As has been said, the economy has been in decline now for six quarters. It is the worst decline since the war. The fall in output last year was the steepest since 1931. The Treasury has helpfully briefed the press saying that it should not exaggerate and that in some ways this recession is not as steep as the Thatcher recession of the early 1980s. That is some comfort! There is still time—because this recession is lengthening and deepening and there is no statistical evidence for the Government's present optimism. Already the below-average growth rate that we have had since 1979 is estimated to have cost the nation £50 billion in lost additional resources, as my noble friend Lord Jay argued.

The Government have recently tried to put the blame on the world recession. I am afraid that that will not stand up to scrutiny. The recession started earliest in Britain because of the policy failures of up to six years ago when the Government deregulated the building societies in 1986. I stress that that was before the Stock Market crash. Monetary numbers were already going wrong that early. The Government then tracked the deutschmark at the wrong time and then slashed direct taxes around the time of the 1987 election, as my noble friend Lord Desai demonstrated so wittily. Thus the Government unleashed a consumer credit and housing boom, the damaging consequences of which still hurt millions of unemployed people, mortgagees, bankrupts and those dispossessed of their homes, to whom my noble friend Lord Pitt referred.

That was economic mismanagement, home-grown, British-made. It was made in No. 11 Downing Street when—let us not forget—the present Prime Minister was resident there. Certainly the world recession has made it more difficult to recover now, but the causes lie in British economic mismanagement. The recession is worst in Britain. That is especially the case in relation to unemployment, as my noble friend Lord McCarthy so incontestably proved. Eight of the 10 regions in Europe with the fastest rising unemployment are in Britain, led by the South East, the South West and East Anglia.

So what is the future outlook? How are the Government proposing to get out of this box? City forecasts are for growth of only 1 per cent. in 1992–93 and the Government have left themselves with few policy options to end the slump. Consumer spending is flat, constrained by personal debt. Corporate spending is flat, constrained by company debt. The banks are in no position to encourage lending, and interest rates—probably the best way to launch a recovery—are constrained by a weak sterling in the exchange rate mechanism. The ammunition for public spending was expended last autumn. There is no honest scope for cutting taxes with a public sector borrowing requirement that is rocketing towards £25 billion next year.

So what is proposed? Apparently what is proposed is tax cuts, financed by ever-more borrowing and a higher PSBR. As my noble friend Lord Peston stated, there is of course a case for running a public deficit at the depths of a recession. We on this side have always supported that, often under criticism from the puritans of the Chicago school. But that depends on two things: the timing and the purpose.

On the timing, if the economy is about to recover, as the Government naturally claim, this is the wrong time. It should have happened earlier. If, however, this is the right time—in the depths of the recession when we need that boost—the Government have been misleading us when they have claimed that recovery is just around the corner.

But the purpose is the most important factor and, I believe, represents the largest political difference between the two sides of the House. It is obviously sensible to run a reasonable deficit in a recession for purposes of capital investment, for the social infrastructure, to encourage individual investment and for welfare to help the victims of the recession. But borrowing simply to finance direct tax cuts ahead of an election is, at best, deeply cynical, as several Conservative Members of Parliament and City commentators have honestly and courageously stated, even using the word "fraud" in one case, which I am sure that we on this side would never use. Such tax cuts would not help those most in need of help in the slump—the unemployed and the homeless. It is worth pointing out that direct tax cuts are not even the most efficient way to kick-start the economy since some of the benefits would be saved, not spent, especially by the better-off, who would be the greatest beneficiaries.

The Government's somersault over the PSBR is breathtaking, especially in the light of past Conservative criticism of Labour's borrowing proposals, often described as immoral. It is only three years since John Major, then Chancellor, said: In future years, our strategy will be based on a zero public sector borrowing requirement". His Chancellor now faces a PSBR of £25 billion, and is considering tax cuts to make it worse. Mr. Major added the next day in March 1988 that, it is unwise economically, and wrong socially"— for Governments— to spend more than they are prepared to raise honestly in taxation". In the Daily Telegraph on 21st February this year, just days ago, he suggests that a PSBR of £30 billion—5 per cent. of national income—is OK. What a somersault as the election approaches.

Big tax cuts now against a background of a PSBR deficit of £25 billion mean that we will have to pay for them later. Will the Government once again, if they win the election, massively increase VAT as after the 1979 election or make slashing cuts in public services and social benefits? With the City forecasting gilt issues of £30 billion next year, tax cuts would ensure years more of high interest rates.

Our conclusion must be that now the glitter and hype of the economic miracle have peeled away—as the noble Lord, Lord Jenkins of Hillhead, so bitingly described it—we see a discouraging picture and a dismal inheritance for any new government. Productivity has improved. Inflation has improved, and that is good; but there is no long-term security in the present lower inflation. Once the economy revives, with our diminished manufacturing capacity inflation will revive. I enjoyed, as usual, the reference made by the noble Lord, Lord Marlesford, to the trade-offs between inflation and unemployment. I enjoyed it partly because he admitted, almost brazenly, that the Government began in 1979, whereas the Minister's figures almost always begin in 1981. However, on not riding two horses at the same time, I should tell the noble Lord that one of my previous employers in Downing Street always used to say, "If you cannot ride two horses at the same time, you shouldn't be in the circus".

But what a price to pay for reducing inflation—with a crippled economy and all the social damage that has resulted, as was explained in several distinguished speeches which have left me nothing to say on that point. My noble friend Lady Hollis made a comprehensive sweep of the social landscape; my noble friend Lady Hilton was authoritative on law and order; my noble friend Lord John-Mackie was equally authoritative on agriculture; my noble friend Lord Rea spoke about increasing inequalities; and the interesting link with the developing world was powerfully put by my noble friends Lord Judd and Lord Hatch.

Consequently, the social and economic problems in our society remain uncured and in many ways worse. Long-term structural unemployment is worse; our manufacturing base is diminished; investment is too low; our transport infrastructure is collapsing; and, above all, our education system, upon which the country's future depends, is demoralised and deprived of adequate resources.

Next week's Budget, if the Government can agree upon it, will most likely be irrelevant to those economic and social fundamentals. Any tax cuts threaten to be as ephemeral and as rash as a shot of heroin in the arm of the electorate, with the Government hoping that the euphoric delusion and escape from reality will last until the election is over. Well, as Mr. Major himself has said, future generations will be left to pick up the bill. The Government are divided, dithering and uncertain. They are uncertain about what to do in the Budget and even about when to face the electorate. But there is no uncertainty about where the responsibility lies for our sad economic and social problems: it lies with the Government, and we are certain about the electorate's imminent decision. It is time for a change.

7.55 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Lord Henley)

My Lords, I was most interested to hear that the noble Lord, Lord Donoughue, wants to return to the circus. I wonder whether it is as a tightrope walker, a juggler or perhaps even one of the clowns. I join all other noble Lords in congratulating the noble Lord, Lord Rodgers, on his maiden speech. I admire his ability to choose a subject as uncontroversial as the state of the economy when as director general of the RIBA he could have spoken on much more controversial matters such as the current state of architecture and the standards of modern architects. I admire his discretion.

The debate has covered many subjects. I am sure that noble Lords will understand if I say at the outset that I cannot respond to most of the points. I do not believe that anyone will expect me to deal at great length with matters relating to agriculture, important though they are in the context of the entire economy. Similarly, I do not intend to cover OPEC, Canada, Australia, overseas aid, environmental problems or even drug abuse, as mentioned by the noble Lord, Lord Rea. I should, however, like to remind the noble Lord that drug abuse is not merely a question related to levels of income; it exists at all income levels. To try to attribute the problem to low standards of living is going a bit too far.

Lord Rea

My Lords, that was not the point about drug abuse that I was making. It was to show that it has the most severe economic effects and affects crime. The people who are the main drug abusers in this country are the unemployed and the disadvantaged.

Lord Henley

My Lords, I accept that. All I am saying is that it is not a subject into which I can go in any great detail on an occasion such as this. It is a problem in all sections of society. There was considerable speculation by the noble Lord, Lord Donoughue, and others about the Government's plans. They will be announced in the forthcoming Budget. Noble Lords will understand that those are not matters upon which it would be right for me to respond. Noble Lords will have to wait until my right honourable friend makes his Budget Statement next week. Even the noble Lord, Lord Hatch, will accept that he could not expect a statement on those matters from me.

The noble Lord, Lord McCarthy, was somewhat surprised that there had been no mention of the various social consequences to which the Motion refers. I intend to concentrate more on that topic. My noble friend Lord Brabazon dealt largely with the Government's economic policy. Perhaps noble Lords will bear with me, but I intend to concentrate upon social aspects.

The noble Baroness, Lady Hollis, made a passionate speech about the income levels of many of the less well off in society. She was of course wrong on a number of key points. For example, it is not true that the poorest 10 per cent. of the population have seen no improvement in their incomes. I shall quote from a report on low incomes by the Social Services Select Committee in another place: Real disposable incomes grew by more than 30 per cent. between 1979 and 1988, with increases in real incomes being seen at all levels of income scale". The noble Lord, Lord Hatch, claimed that the incomes of the poorest 20 per cent. had fallen over that period. I refute that. If the noble Lord looks at the households below average income figures that the Government have produced, he will find that every decile has seen increases in real disposable income.

Baroness Hollis of Heigham

My Lords, I am grateful to the Minister for giving way. Had he completed the quotation from the report of the Select Committee on Social Security chaired by Frank Field in another place, he would have told the House that the increase, after housing costs, to the lowest 10 per cent. was under 2 per cent. compared with an average of 35 per cent. As a result of a recalculation of the Government's figures which misled the other place, I am sure unintentionally, at an earlier stage, it was clear that there had been no increase in real wealth for the bottom 10 per cent.

Lord Henley

My Lords, that is simply not the case. For every group, for every quintile or decile there has been an increase in real disposable income. The noble Baroness and the noble Lord, Lord Peston, went on to complain about cuts in benefit. This is at a time when we have seen growth in social security expenditure of 40 per cent. over the past 11 years. They mentioned cuts allegedly in the income of pensioners at a time when we have seen the income of pensioners grow by over a third in real terms, since 1979. We have seen the average real income of pensioners grow by 3 per cent. per year.

I shall not give way to the noble Baroness. We have seen the incomes of pensioners grow on average by 3 per cent. a year over the past 10 or 12 years. Under the last Labour Government, it grew by 3 per cent. in the entire period of Labour Government, that is 0.6 per cent. per year. We have seen it grow by more than that in every year.

The noble Baroness says, "because of SERPS". The income of pensioners from savings under the last Labour Government fell. The income of pensioners from savings under this Government more than doubled. The same is true of the income of pensioners from occupational pensions. I could go on. At the same time, we have seen that the less well off pensioner has not lost out. We have seen increases above the rate of inflation in rates of income support premiums paid to pensioners.

I do not accept that there has been a failure of the wealth of the nation to trickle down. I do not accept that, as the noble Baroness argued, we have seen a growth in the number of those in poverty. I totally reject the noble Baroness's computation of poverty. Neither this Government nor any previous government have acknowledged her or any other definition of poverty.

To argue that the gap between the top 20 per cent. and the bottom 20 per cent. is greater than it was 100 years ago is living in cloud-cuckoo-land. To compare the bottom 20 per cent. in the income scale today with the bottom 20, 30, 40, 50 or even 60 or 70 per cent. of the population 100 years ago is simply not on. We are not comparing like with like. As I said before, we have seen the income of every section of the community grow.

To take one example of growth in social security expenditure, we have seen expenditure on the long-term sick and disabled grow by of the order of 100 to 140 per cent. In today's prices it has gone from £5 billion in 1979 to an expenditure of around £12 billion today. No doubt the noble Baroness and others will argue that the levels have not gone up, there are just more recipients. I quite accept the argument that there are more recipients of benefits for the long-term sick and disabled. But even the noble Baroness would not argue that it was a Tory Government who made those people disabled. What we have done is seen more benefits for the disabled reach more people.

Lord Hatch of Lusby

My Lords, perhaps I may intervene as the noble Lord mentioned me. Will he read the Government's family expenditure survey reports of 1988 and 1989, look at the figures and see whether my figures were correct? If they were, perhaps he will make an apology; and, if they were wrong, will he refute them?

Lord Henley

My Lords, I imagined that the noble Lord based his figures on the survey figures. However, I must caution him about the possibly incautious use of statistics. The fact that the figures use money values confirms that they are not taken from the households below average income series of statistics from which I quoted. That is the agreed, sound basis on which the Government measure income changes over time. This series, recognised by the Institute of Fiscal Studies and the Select Committee on Social Security, is used because it is not prey to the errors which can arise if a single comparison between different individual years' figures is made. An allowance has to be made, for example, for changes in the composition of households over time and the HBAI series showed that the poorest 10 per cent. of households saw real increases in incomes between 1979 and 1987. The social security Select Committee's own figures confirm this trend for the years from 1979 to 1988. I am afraid that I cannot take the noble Lord beyond those figures because the figures end in 1988.

The noble Baroness, Lady Hilton, seemed to argue that it was poverty or relative deprivation that caused crime. She particularly blamed the riots in North Tyneside on low incomes and poverty. I have to say that I do not accept that argument. I can see that the theory that a growth in unemployment is accompanied by people helping themselves or feeling released from the constraints of normal society may seem to make sense. However, it is not borne out by careful analysis. It is also—and this is a much repeated truism for which I make no apology—an insult to the majority of the unemployed and less well off to say that the mere state they are in will drive them to crime. To argue that the state of the economy pushes people into—

Baroness Hilton of Eggardon

My Lords, I said clearly that the causes of crime were multi-factorial and in no way did I traduce the majority of people who are unemployed. I argued carefully that it was a variety of factors, one of which might be the atmosphere of materialism created by the Government. It was not just unemployment by any means that created crime.

Lord Henley

My Lords, this is a time-limited debate and I do not intend to take any more interventions. I noted what the noble Baroness said. I intend to speak for 25 minutes and I shall sit down at the end of that time to allow the noble Lord, Lord Peston, to wind up.

I accept, as the noble Baroness does, that there is no single cause of crime. There are many factors which may increase the likelihood of someone choosing to offend, including behaviour and values of parents. It is the existence of aggravating factors that makes it possible to pursue various kinds of preventive measures. But this does not mean that they are excuses for lawlessness or hooliganism. Low incomes or unemployment do not cause crime, and we should be wary of offering up justifications for those who are only too ready to enlist them in the denial of their own responsibility and culpability.

In passing, I also wish to say to the noble Baroness that I reject her allegations that changes to the benefit regime for 16 to 17 year-olds encouraged crime. We offer three options: school, training or work. What we do not offer is the option to go on to benefit with the certain exceptions that exist for those in the vulnerable groups. We do not offer the option to go on to benefit at an early age and for people to absorb themselves into a culture of benefit dependency. It is that option that noble Lords and noble Baronesses opposite have recommended. It is that option that I suggest is far more likely to lead to a life of crime.

Turning briefly to some of the health issues that have been raised, perhaps I may say in passing that the noble Lord, Lord Peston, made the point that he would like to distinguish between the Government's spending on capital and income. I ought to say a little about capital expenditure in the health service. Over the past 12 or 13 years we have seen over 500 major hospital building schemes started or completed. Under the last Labour Government, capital spending in the National Health Service fell by 29 per cent.

The noble Lord, Lord Rea, complains about the growing gap in health provision. I would like to make one or two brief comments.

Lord Rea

Not health provision, health.

Lord Henley

My Lords, the noble Lord spoke purely about health rather than health provision. I should like to make two points purely about health. First, the noble Lord said that by certain changes in lifestyle, we could see an increase in life expectancy of two years. May I tell him that during the last years of Conservative Government we have seen a growth in life expectancy of exactly that—two years, since 1979? That is a considerable increase.

I think the noble Lord then went on to allege that the least well off, that is those on income support, were probably unable to afford an adequate diet and that dietary aspects were one of the most important parts of health. That argument again does not hold. I would accept that an adequate diet is important to health, but there is no evidence that one cannot maintain an adequate diet on income support levels. There is no evidence that massive increases in benefit levels would merely lead to better expenditure on food.

Lord Rea

My Lords, I did not mention diet once.

Lord Henley

My Lords, the noble Lord also made a rather interesting comparison between the United Kingdom and Japan showing the effect of relative deprivation on health in contrast to the effects of the overall level of prosperity. I suspect there must be something missing from this story. One cannot suggest that we could improve the health of the least well off simply by reducing the incomes of the better off. As the noble Lord himself will know, we prefer rather less occult methods of pursuing greater prosperity and efficiency in health provision.

The noble Lord, Lord McCarthy, attacked this Government—on various occasions we had argued quite rightly in favour of certain proposals—on the grounds that our proposals might have had deleterious effects on employment and levels of unemployment. I stick by that. I accept that the current level of unemployment is regrettable. But one should also stress two things: we have the second highest level of employment within the European Community. I believe my noble friend Lord Wade said that. To then move on to the Opposition's rather ludicrous and absurd policy of bringing in a national minimum wage would do massive damage to the economy. Up to 2 million jobs could be destroyed by the second stage—

Noble Lords

Order!

Lord McCarthy

My Lords, I believe the Minister is actually going to give way. Will the Minister not answer my point that this figure of 2 million is 24 times the reasonable estimate of everyone else? Why do the Government keep making these figures up?

Lord Henley

My Lords, I have not the first idea who everybody else is. I see that the noble Baroness, Lady Hollis, points to the noble Lord, Lord McCarthy. Therefore I take it the noble Lord is who is meant by everybody else. I take her point. Up to 2 million jobs could be destroyed by the second stage of the minimum wage if pay differentials were fully restored. Most studies of employment effect agreed there would be considerable job losses. I would include among those studies even a study by the Fabian Society—the noble Lord might know a little about that society—entitled Making a Minimum Wage Work which concedes that up to 880,000 job losses have been estimated.

I shall now say a few words about the ERM. That has caused some anxiety to both my noble friend Lord Joseph and to the noble Lord, Lord Jay. We joined the ERM in October 1990 when we judged the time was right. Some claim that we joined at too high a rate. In fact we joined at around the long run average. Since then, our inflation rate has fallen to below the EC average and within a whisker of Germany's. Interest rate reductions have been made possible by a steadfast commitment to maintaining sterling within its ERM bands. Far from stimulating the domestic economy, devaluation might make interest rate rises necessary as the markets encountered doubt again about our anti-inflation commitment. The Government will do nothing to undermine our ERM position or our anti-inflation stance.

In conclusion, I hope I may pull together just three strands of what has been said today. First, we are in a position to weather the social effects of the current economic position only because this Government have laid firm foundations by controlling public expenditure and maintaining downward pressure on inflation—my noble friend Lord Boyd-Carpenter underlined that policy was important—and by improving the efficiency and effectiveness of public sector services during a period of sustained economic growth. These foundations lie both in the public sector and in the increased capacity of individuals to take responsibility for providing for their own futures.

The second point is that despite the implication conveyed to some degree in the Motion of this debate, we are not as a government being compelled by the economy to forgo investment in future, nor are we unable to make provision for those who are affected by the recession. Thirdly, it is most important to recognise that we have put in place the necessary conditions not only for economic recovery but also for continuing flexibility and dynamism in the economy in years to come.

The last year has been a trying one for many families and businesses. Unemployment and business failure cause difficulties whenever they occur, but they are perhaps even harder to weather when the economy in general is sluggish. No one would seek to deny that the problems associated with recession are serious. But the problems which attend runaway inflation are more serious still and the disproportionate costs which inflation imposes on the less well off should be universally acknowledged. Obviously they are not acknowledged by the noble Lord, Lord Rea, and others.

It has been clear for some time that recovery has been delayed for longer than was hoped at the time of the Autumn Statement. But it is equally clear that conditions for recovery are in place, as my noble friend Lord Boardman said. Low inflation and lower interest rates; rising real earnings and improving financial positions among the personal and corporate sectors all create the basis for a renewal of consumer confidence and a subsequent upturn in demand.

The Government and the majority of independent forecasters expect growth to become established in the course of 1992. Because it will be grounded in low inflation, that growth will be sustainable. This is good news for everyone, for growth on those terms is the only reliable foundation for properly considered social provision. Growth alone might furnish funds in any given year; but unless it is sustained beyond that, the programmes it finances are doomed to be both short term and short termist—the bad British disease identified by the noble Lord, Lord Jenkins.

We may differ to some degree about the ways and means to ensure a healthy economy and a healthy society, but I feel we can agree, in the final analysis, that it is the confidence of the individual human being and his commitment to and enthusiastic investment in the future which sustain these goals in the long term. I believe we have done much to ensure that those necessary conditions will continue to flourish.

8.17 p.m.

Lord Peston

My Lords, it remains for me to thank all noble Lords who have taken part in this debate. I must of course congratulate the noble Lord, Lord Rodgers of Quarry Bank, on his excellent maiden speech. However, I found all the speeches most interesting. Indeed I am tempted by the quite fascinating contribution of the noble Lord, Lord Henley, to start the debate all over again but I hasten to add that I shall refrain from doing so. I sincerely believe there are many sides to these economic and social questions and little is known for certain. Therefore we may agree to differ, but honourably so. My Lords, I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.